IAB-DISCUSSION PAPER

Articles on labour market issues

Recruitment Policies, Job-Filling Rates

15|2020
and Matching Efficiency

Carlos Carrillo-Tudela, Hermann Gartner, Leo Kaas

ISSN 2195-2663
Recruitment Policies, Job-Filling Rates
and Matching Efficiency

Carlos Carrillo-Tudela (University of Essex)

Hermann Gartner (IAB Nuremberg and Friedrich-Alexander University Erlangen-Nuremberg)
Leo Kaas (Goethe University Frankfurt)

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The “IAB-Discussion Paper” is published by the research institute of the German Federal Em-
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Contents

Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Zusammenfassung . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

2 Empirical Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.1 Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
2.2 Variation in Hiring Rates and Vacancy Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
2.3 Recruitment Policies and Hiring Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
2.4 Vacancy Yields Across Labor Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

3 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

4 Quantitative Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.1 Calibration Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
4.2 Fit of the Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
4.3 Variation of Matching Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
4.4 The Role of Recruiting Intensity for Labor Market Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

List of Figures

Figure 1: Variation by 30-day establishment growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Figure 2: Wage generosity and hiring rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Figure 3: Hiring standards and hiring rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Figure 4: Search effort and hiring rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Figure 5: Market tightness, job-finding rates and vacancy yields in 36 (region×skill) la-
bor markets in Germany (2010–2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Figure 6: Shares of hires by 30-day establishment growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Figure 7: Variation of the main recruitment indices (with zero hires observations removed).48
Figure 8: Variation of the main recruitment indices (only establishments with 20+ work-
ers). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

IAB-Discussion Paper 15|2020 3

Abstract

Recruitment behavior is important for the matching process in the labor market. Using unique
linked survey-administrative data, we explore the relationships between hiring and recruit-
ment policies. Faster hiring goes along with higher search effort, lower hiring standards and
more generous wages. To analyze the mechanisms behind these patterns, we develop a di-
rected search model in which firms use different recruitment margins in response to produc-
tivity shocks. The calibrated model points to an important role of hiring standards for match-
ing efficiency and for the impact of labor market policy, whereas search effort and wage poli-
cies play only a minor role.

Zusammenfassung

Für das Matching am Arbeitsmarkt spielt das Rekrutierungsverhalten der Betriebe eine zen-
trale Rolle. Um zu untersuchen, wie das Rekrutierungsverhalten mit der Zahl der Einstellun-
gen zusammen hängt, verknüpfen wir die IAB-Stellenerhebung mit administrativen Daten.
Es zeigt sich: Mehr Einstellungen sind mit mehr Suchaufwand verbunden, mit großzügigeren
Löhnen und mit geringeren Anforderungen an die Arbeitsuchenden. Um zu analysieren, wel-
cher Mechanismus diesem Muster zugrunde liegt, entwickeln wir ein Modell mit zielgerichte-
ter Suche. Betriebe können dabei bei Produktivitätsschocks ihr Rekrutierungsverhalten über
mehrere Stellschrauben anpassen. Im kalibrierten Modell erweist sich das Anforderungsnie-
veau als wichtigste Stellschraube für die Auswirkung auf die Matching-Effizienz und für die
Wirksamkeit von Arbeitsmarktpolitik. Suchaufwand und die Lohnpolitik spielen demgegen-
über eine kleinere Rolle.

JEL

E24; J23; J63

Keywords

Vacancies; Recruitment; Labor market matching

IAB-Discussion Paper 15|2020 4

Acknowledgements

We thank Alex Clymo, Melvyn Coles, Steven Davis, Pedro Gomes, Rafael Lopez de Melo, Simon
Mongey, Ctirad Slavik, Gianluca Violante, and seminar and conference audiences at Essex SaM
workshop, IAB Nuremberg, Macro-SaM Marrakech workshop, Essex-Frankfurt SaM workshop,
IZA Workshop: Heterogeneity and the Labor Market (Bonn), SaM Virtual Congress, Aarhus,
Birbeck, Tilburg and Uppsala for their comments and discussions. Hermann Gartner and Leo
Kaas thank the German Research Foundation (grant GA 2737/2 and KA 1519/10) for financial
support. An earlier version of this paper circulated under the title “Understanding Vacancy
Yields - Evidence from German Data”.

IAB-Discussion Paper 15|2020 5

1 Introduction

Recent evidence documents substantial and systematic variation in job-filling rates across
firms. This is hard to reconcile with a standard aggregate matching function which stipulates
that the job-filling rate is a function of the vacancy-unemployment ratio (labor market tight-
ness) in the relevant labor market but is otherwise unrelated to the characteristics of the firm.
Differences in job-filling rates are particularly large with respect to the firms’ employment
growth and hiring rates; firms that hire more do so by filling their vacant jobs faster (see Davis/
Faberman/Haltiwanger, 2013). Such variation matters for matching efficiency: changes in
aggregate recruiting intensity can account for a persistent shift of the Beveridge curve in the
aftermath of the Great Recession (see e.g. Gavazza/Mongey/Violante, 2018). While there is a
great amount of work documenting the effectiveness of workers’ job search efforts, relatively
little is known about firms’ efforts to make their recruitment process more effective. As a con-
sequence, standard labor market theories focus on the firms’ decisions to create jobs, while
taking recruitment behavior and its impact on matching efficiency as exogenous model pa-
rameters. These limitations make it difficult to evaluate which hiring practices are more sen-
sitive to labor market interventions, leaving policymakers with little guidance on how best to
improve the effectiveness of their policies.

Different mechanisms can possibly explain why some firms hire faster than others. Expanding
firms may invest more in search or screening intensity and hence fill jobs more quickly (e.g.
Gavazza/Mongey/Violante, 2018), they may pay higher wages (or offer more attractive non-
pecuniary job benefits) to attract more workers (e.g. Kaas/Kircher, 2015), or they may reduce
their hiring standards (e.g. Sedlacek, 2014). Other explanations, unrelated to the choices of
firms, can be measurement issues due to time aggregation (since the vacancy stock is ob-
served infrequently, some hiring occurs without a reported vacancy) or composition effects
(for instance, firms that grow faster may be those firms that create jobs with lower skill re-
quirements that are easier to fill). Without detailed information about the recruitment pro-
cess or about specific characteristics of the hired workers, it is difficult to assess which of
these channels are responsible for the observed variation in job-filling rates and ultimately in
matching efficiency.

In this paper we investigate the following aspects of recruiting intensity: (i) the extent to
which firms use search effort, wage generosity and hiring standards to hire faster; (ii) the im-
pact of these recruitment margins on matching efficiency; (iii) the impact that labor market
policy has on these recruitment margins and through them on job-finding rates. We do this
by first presenting new evidence on how search effort, wage generosity and hiring standards
vary with hiring and job-filling rates. In order to understand the economic mechanisms be-
hind these relationships and their impact on matching efficiency, we propose and quanti-
tatively assess an equilibrium search-and-matching model of the labor market where differ-

IAB-Discussion Paper 15|2020 6

ential hiring rates are determined by vacancy creation, search effort, wage generosity and
hiring standards decisions. Our findings show an important role of employers’ hiring stan-
dards for matching efficiency and labor market policies that aim at increasing workers’ job
finding prospects, whereas employers’ search effort and wage generosity only play a minor
role.

To describe the empirical patterns, we analyze data from the Job Vacancy Survey (JVS), an an-
nual survey of German establishments, which we link to administrative matched employer-
employee data (Integrated Employment Biographies, IEB) for the period 2010–2017. The link-
ing of these data is novel and crucial for our purposes. The JVS contains information on the
stock of vacancies at the day of interview, which is further broken down into three skill lev-
els. From the administrative data, we measure the hires flow in the period after the interview.
This permits us to calculate the vacancy yield (hires per vacancy) as a proxy of the monthly
job-filling rate, in a similar fashion as Davis/Faberman/Haltiwanger (2013) do using the Job
Openings and Labor Turnover Survey (JOLTS) for the U.S. In line with the U.S. data, we ver-
ify that most of the observed variation in hiring rates along the establishment growth dis-
tribution arises from the vacancy yields margin; that is, establishment that grow faster hire
more per vacancy. This is a robust relationship that holds after controlling for establishment
size, age and industry (see also Mongey/Violante, 2020). We also examine whether the ob-
served characteristics of new hires, such as previous employment status, age or gender vary
systematically with the establishments’ growth rates, which could potentially contribute to
variation of vacancy yields. We find little evidence in favor of composition effects on these
dimensions.

Differently from the data used in the aforementioned contributions, the JVS contains infor-
mation about the establishment’s recruitment behavior and outcome for the last case of a
hire. This information can be connected to the factual hiring patterns of the establishment
from the linked administrative data. We construct separate indices capturing each establish-
ment’s search effort, wage generosity and hiring standards. These indices build on direct in-
formation from the survey, but also utilize wage information for all new hires during the same
period from IEB data. In this way we capture different aspects of an establishment’s recruit-
ment policies at a given point in time. We demonstrate that establishments indeed make use
of all three recruitment margins: All standardized indices vary with the hiring rate of an estab-
lishment in a systematic way even after controlling for a wide range of job and establishment
characteristics. Concerning variation of vacancy yields across local labor markets and over
time to investigate aggregate labor market outcomes, we find that together all three recruit-
ment measures contribute in a similar proportion as labor market tightness to the variation
in vacancy yields, pointing to their importance in determining matching efficiency.

To investigate the mechanisms behind these patterns, we build a tractable directed search
model similar to Moen (1997) and Garibaldi/Moen (2010) in which multi-worker firms oper-

IAB-Discussion Paper 15|2020 7

ate multiple projects with a constant-returns technology and adjust their vacancy postings,
wage policies, search effort and reservation match-specific productivity (hiring standards) in
response to idiosyncratic productivity shocks. We characterize the unique equilibrium and
show that firms with more productive projects post more vacancies, exert more search ef-
fort, offer more generous wages and set lower hiring standards, all of which contribute to
larger hiring rates. Aggregating over firms, the model can then generate the observed posi-
tive relationship between firm growth and vacancy yields where the latter is an endogenous
outcome of all three recruitment policies.

A key feature of our model is that it provides a novel structural decomposition of the aggre-
gate job-finding rate in terms of labor market tightness, on the one hand, and the three re-
cruitment policies on the other. This decomposition allows us to quantitatively investigate
how recruitment behavior contributes to matching efficiency. It also allows us to evaluate
the equilibrium effects of labor market policy on the firms’ recruitment behavior and, thus,
on the rate at which unemployed workers find jobs.

The model is calibrated using the evidence from the JVS and IEB data as well as data on worker
flows to inform the main structural parameters. We exploit cross-sectional variation in the
data at the establishment level and by constructing 36 “local labor markets” based on the
cross-product of three skill levels and twelve regions for the 2010–2017 period. The model is
able to reproduce market-specific (average) wages, unemployment and job-finding rates, as
well as the cross-sectional relationships between vacancy yields and establishment growth,
and the relative responsiveness of search effort, wage generosity and hiring standards to the
variation in hiring rates across establishments that we document empirically. The model is
also consistent with the observed variation in vacancy yields, labor market tightness, search
effort and hiring standards across local labor markets.

Using the model-implied decomposition of the matching function, we find that most of the
variation of the job-finding rate across local markets comes from the creation of jobs (market
tightness) and from hiring standards. However, firms in tighter labor markets are more selec-
tive which in turn reduces matching efficiency. This arises as in tighter, more productive labor
markets unemployed workers have higher reservation wages and hence firms must become
more selective when they offer sufficiently high wages to fill their positions. This feature mat-
ters when comparing labor markets both across the skill and the geographic dimensions. It
is also consistent with the observation that job-finding rates, average wages and hiring stan-
dards are positively correlated across local labor markets in the data.

Variation of search effort has a positive, but quantitatively less important effect on job-finding
rates, although we observe a more prominent impact of search effort in high-skill labor mar-
kets. Since we consider segmented local labor markets, only the dispersion of wages, but not
the average wage level, contributes to matching efficiency. Indeed, wage dispersion per se

IAB-Discussion Paper 15|2020 8

reduces matching efficiency, but the degree of wage dispersion does not differ between mar-
kets in our model and hence does not contribute to the variation of matching efficiency.1 This
implication is consistent with the observation that in our data wage dispersion (measured by
the coefficient of variation) varies little across local labor markets, particularly when control-
ling for skill levels.

Finally, to investigate the role of labor market policy for job-finding rates through its effects
on recruitment measures, we consider the impact of a reduction of unemployment benefits,
mimicking one aspect of the Hartz labor market reforms that were implemented in the mid
2000s in Germany. Our calibrated model shows that job-finding rates increased the most in
low-skill labor markets. Similar to our findings for matching efficiency, the creation of jobs
(market tightness) and hiring standards are the two dominant forces that shift the job-finding
rate in response to the policy change. But this time the two factors go in the same direction:
As unemployment income is reduced and workers’ reservation wages become lower, firms
create more vacancies and reduce their hiring standards, both of which contribute to an in-
crease of the job-finding rate. The selectivity margin accounts for about a quarter of the in-
crease in the job-finding rate for the whole labor market. For the low-skill labor market, this
margin is even more prominent where it is responsible for a third of the increase of the job-
finding rate. On the other hand, changes of search effort or wage dispersion do not matter
much for the aggregate policy effects. The importances of vacancy creation and the selec-
tivity margin provide a natural explanation for the findings of Carrillo-Tudela/Launov/Robin
(2020), who show that job-finding rates increase the most in low-skill labor markets after the
implementation of the Hartz reforms.

Related Literature

Our paper contributes to a large and growing literature that documents the several aspects
of firms’ recruitment policies. Early examples are Barron/Bishop (1985) and Barron/Bishop/
Dunkelberg (1985), who investigate the determinants of the extensive and intensive margins
of employer search effort in the hiring process. They use information from the Employer Op-
portunity Pilot Project (EOPP) in the U.S. about the number of applicants, interviews, job of-
fers, hours involved in processing and screening applications and several job and employer
characteristics. Like the JVS, the EOPP data provides information that arises from the last
newly hired worker. Unlike the JVS, however, it is much smaller, covers a much shorter time
span, does not have information about the usage of search channels or the geographic scope
of search (which are direct measures of search effort) and cannot be linked with matched
employer-employee administrative data or with the employers’ job or worker flow rates.

1
A higher wage level does not increase matching efficiency in our model essentially because workers’ search
intensity is exogenous. The dispersion of wages reduces matching efficiency since it induces dispersion of job
queues in different submarkets. If job queues are more dispersed, concavity of the matching function implies
that the number of aggregate matches is lower which follows from Jensen’s inequality.

IAB-Discussion Paper 15|2020 9

Several other studies also use EOPP data to explore the implications of hiring standards and
offered wages on the probability of filling a vacancy. Burdett/Cunningham (1998) find that
as employers increase their hiring standards by requiring greater experience and education
from their applicants, the probability of filling their vacancies decreases.2 Faberman/Menzio
(2017) relate the wage offered to the probability of filling a vacancy, finding that higher wage
offers go together with longer vacancy durations, seemingly contradicting the predictions
of the standard competitive search model. However, Marinescu/Wolthoff (2020) show using
online U.S. vacancy data that a positive relation arises between posted wages and the num-
ber of applicants (and hence higher job-filling rates) when one controls for job titles as they
reflect better hierarchy, experience, and the level of specialization of jobs.3 Further, Kette-
mann/Mueller/Zweimueller (2018) use administrative data on Austrian job centres and link it
to matched employer-employee administrative data, finding a positive relation between va-
cancy filling rates and starting wages. Our results complement these findings, showing that
lower hiring standards, more generous wage policies and higher search effort all go together
with larger hiring rates.

Davis/Faberman/Haltiwanger (2012, 2013) using JOLTS micro data were the first who described
the “hockey stick” relationships between establishment growth, hiring rates and vacancy
yields. We verify that such relationships are similar in our German data and we investigate
to what extent different recruitment policies help firms hire faster. Lochner et al. (2020) also
use the JVS and study how particular measures of employer search effort and hiring standards
vary across the establishment growth distribution. Our paper links the JVS with matched
employer-employee data which allows us to construct broader measures of recruitment poli-
cies, including the effects of employers wage generosity, and to relate them to the variation of
vacancy yields and hiring rates. Further, we quantitatively assess the implications of wages,
search effort and hiring standards for matching efficiency and labor market policy within an
equilibrium search-and-matching model.

There is also a growing theoretical literature interested in the role of firms’ recruiting inten-
sity on aggregate labor market outcomes and on the micro-level relationships uncovered by
Davis/Faberman/Haltiwanger (2013). Recent work extends the canonical Diamond-Mortensen-
Pissarides framework to feature multi-worker firms which chose search effort as in Gavazza/
Mongey/Violante (2018) and Leduc/Liu (2017) or wages as in the competitive-search models
of Kaas/Kircher (2015) and Schaal (2017). Selection cutoffs among heterogenous pools of ap-
plicants (hiring standards) are also introduced in random search environments like the ones
proposed by Acharya/Wee (2020), Baydur (2017), Chugh/Merkl (2016), Sedlacek (2014) and
Villena-Roldan (2012). Our paper proposes a unified framework to study these three differ-

2
See also Van Ours/Ridder (1992) for evidence on vacancy durations using Dutch data.
3
Using online Chilean vacancy data, Banfi/Villena-Roldan (2019) find that a positive relationship between
offered wages and the number of applications holds even for job ads where wages are revealed “implicitly”
through wage-bracket filters. Belot/Kircher/Mueller (2018) find a similar positive relationship between posted
wages and applications using a field experiment among job seekers.

IAB-Discussion Paper 15|2020 10

ent measures of recruiting intensity and to quantify them in accordance with our empirical
findings. A competitive search environment is helpful as it provides an intuitive and simple
way through which changes in posted wages have a direct effect on a firm’s hiring and job-
filling rates.4 In this sense our model is close in spirit to Wolthoff (2018) who also considers
these different recruitment policies and uses EOPP data for calibration of his model. The key
differences are that we explicitly consider firm dynamics, investigate how these policies affect
job-filling rates in multi-worker firms and how they matter for aggregate matching efficiency
and labor market policy.

4
Although this is also possible in an extended version of the random search environment with on-the-job
search proposed by Mortensen (1998), it would needlessly complicated the analysis. Further, we find little evi-
dence that establishments meaningfully change their hiring policies when they hire an employed relative to an
unemployed worker, suggesting that for our purpose adding on-the-job search is not of first order.

IAB-Discussion Paper 15|2020 11

2 Empirical Findings

2.1 Data

Our primary data source is the Job Vacancy Survey (JVS) of the Institute for Employment Re-
search (IAB) which is a representative cross-sectional survey of establishments in Germany
(for a data description, see Bossler et al., 2019). The main purpose of the survey is to mea-
sure the number of vacancies at these establishments, over and above those that are officially
reported at the Federal Employment Agency, and to obtain information about the recruit-
ment processes of these establishments. While the survey is conducted annually since 1989,
establishment IDs can be obtained and linked to administrative records only from the year
2010 onward. Given this matching restriction we focus on the years 2010–2017, for which we
observe around 13,000-15,000 establishments per year.

The survey is conducted in the last quarter of a year and consists of two parts. The first part
contains general information about the establishment, including employment, location, in-
dustry, and whether the establishment was facing financial, demand and/or workforce re-
strictions. This part of the survey also contains the current stock of vacancies (defined as
“open positions to be filled immediately or to the next possible date”), broken down by three
levels of education requirements (no formal education, vocational training, and university
degree).

The second part of the survey contains detailed information about the recruitment behavior
of the surveyed establishment. For that purpose, information about the last case of a suc-
cessful hire within the last 12 months is collected. Not all surveyed establishments hired a
worker in the last 12 months (or did not fill this part of the survey for other reasons). Thus we
have information about the recruitment behavior for a subsample of around 9,000-10,000
establishments per year. Besides several questions about the hiring process that we further
describe below, the survey includes information about the hired person (age, education, pre-
vious employment status, monthly starting wage) and a few general questions about the job
(occupation, permanent/temporary, replacement hire). It is important to note that in about
90 percent of the cases, the recorded information for the last case of a hire corresponds to
single vacancy job openings.5 Appendix A presents the main summary statistics of our JVS

5
Carrillo-Tudela et al. (2020) are able to identify the worker hired in the JVS in the IAB administrative data
using the matching procedure developed in Lochner (2019). They are also able to identify any additional hires
that could arise from the same job opening by using the establishment identifier, the job occupational code and
the date in which these hires were recorded in the administrative data. This procedure reveals that during the
period 2010-2017 one can find additional hires in the administrative data that share the same establishment
identifier, 5-digit occupational code and calendar starting date (day/month/year) with hires recorded in the JVS
in only 3 percent of the cases. If one uses instead a 30-day time interval around the recorded date of the JVS hire
to allow for different starting dates, this proportion increases to 13 percent. Further, nearly all of these multiple
hires in many of the regressions discussed below.

IAB-Discussion Paper 15|2020 12

sample. Note that by design of the survey, the search event is finished before the date of
interview.

We can link the JVS to the administrative records of individual employment spells which
are collected by the Federal Employment Agency (Integrated Employment Biographies, IEB).6
Thus we can observe, for any particular day, all employed workers in JVS establishments
(with information about education, age, gender, nationality and daily earnings), and thus in-
fer their hires and separations during any arbitrary time interval.7 We measure vacancy rates,
hiring rates and employment growth rates over intervals of 30 days after the day of interview.
This allows us to calculate a measure of the vacancy yield (hires divided by the stock of va-
cancies at the beginning of the period), hence analogously to the monthly vacancy yield that
Davis/Faberman/Haltiwanger (2013) consider using data from the Job Openings and Labor
Turnover Survey (JOLTS).

2.2 Variation in Hiring Rates and Vacancy Yields

Variation in the hiring rate (hires 𝐻 divided by employment 𝐸) arises from variation in the
vacancy rate (vacancies 𝑉 divided by 𝐸) and the vacancy yield (𝐻 divided by 𝑉 ) as implied
by the decomposition

𝐻 𝑉 𝐻
= × . (2.1)
𝐸 𝐸 𝑉
We present the variation of each of these components across employment growth bins. This
approach allows us to somewhat mitigate a common measurement problem in such data: at
the interview date many establishments report no vacancies, while in the 30 days following
the interview positive hires are recorded.8 We measure the employment growth rate over 30-
day intervals using average size at the beginning and at the end of the interval in the denom-
inator (cf. Davis/Haltiwanger/Schuh, 1998). We partition these monthly employment growth
rates into 29 bins around zero.9 We remove those (typically small) establishments which grow
or shrink by more than 30 percent during the interval. Figure 1.a shows the distribution of

6
The IEB data set encompasses the universe of establishments in Germany that have at least one employee
paying social security contributions. Summary statistics about worker characteristics in the merged sample are
presented in Appendix A.
7
We exclude employer returns from hires and separations. That is, we do not count as part of hires or sepa-
rations all those workers whose employment spell is interrupted for a period less than three months and who
return to their previous employers.
8
Aside from misreporting, this can arise, for example, as some establishments posted vacancies, had their job
offers accepted before the JVS interview date but the new hire started work after the interview date. Another
reason could be that a vacancy was posted after the interview date and was filled sufficiently quickly within the
30-day interval after the JVS interview. Our data do not allow us to explore these possibilities.
9
Next to a mass point at zero, we use 28 symmetric bins with positive and negative growth rates where inter-
vals closer to zero are smaller.

IAB-Discussion Paper 15|2020 13

monthly employment growth, where 58.2 percent (38,767 observations) of establishments
exhibit zero growth, 24.4 percent (16,269 observations) exhibit negative growth and 17.4 per-
cent (11,564 observations) positive growth.

Figure 1: Variation by 30-day establishment growth

(a) Employment Growth Distribution (b) Hiring Rate

(c) Vacancy Rate (d) Vacancy Yield

Source: Own calculation.

Figure 1.b shows the variation of hiring rates across employment growth bins, where the hir-
ing rate is defined as hires in interval [𝑡0, 𝑡1] divided by average employment. Formally, the
𝐻
hiring rate of an establishment is 0.5(𝐸𝑡0,𝑡1 where 𝑡0 is the day of interview and 𝑡1 is 30
𝑡0 +𝐸𝑡1 )
days after that. Each point on the solid curve shows an employment-weighted average in
a particular growth bin. This graph exhibits a very similar pattern as related graphs based
on JOLTS data (e.g. Davis/Faberman/Haltiwanger, 2013): the hiring rate is essentially flat for
shrinking establishments which still hire to replace some of its workers, but high and steeply
increasing in employment growth in expanding establishments. Note again that we remove
employer returns from hires and separations which gives rise to somewhat smaller worker
flow rates (and larger spikes at inaction) compared to other data sources. In addition to the
bin averages, the dashed curve shows the regression coefficients on bin dummies where we
include controls for industry and establishment size and age. We do this in order to illustrate

IAB-Discussion Paper 15|2020 14

that these patterns are not merely induced by a changing industry or establishment size/age
compositions across bins of establishment growth.

Figure 1.c shows the variation of vacancy rates, defined as vacancies reported at the interview
date 𝑉𝑡0 divided by average employment at 𝑡0 and 𝑡1, again as a weighted average for each
growth bin. Vacancy rates increase from around two percent for stable establishments to
over five percent for establishments that grow by more than 20 percent when not using any
controls. When using establishment size, age and industry controls, however, vacancy rates
appear much more similar, fluctuating between 3 and 4 percent across shrinking, stable and
expanding establishments.

Figure 1.d shows the variation of vacancy yields across employment growth bins where, fol-
lowing (2.1), we define the vacancy yield for every growth bin as the ratio between the hiring
rate and the vacancy rate in that bin which is equivalent to dividing total hires of all establish-
ments in a particular growth bin by the total vacancies of these establishments. As found in
JOLTS data, there is considerable variation of vacancy yields across growth bins in our data.
While vacancy yields are flat in the negative growth range, they increase steeply in the pos-
itive range, from values below one to over four (without controls) or six (with controls). In
conclusion, variation in hiring rates across growth bins is predominately accounted for by
the vacancy yield margin rather than differences in vacancy rates.

Investigating whether expanding employers tend to hire different groups of workers, we find
little evidence in favor of such composition effects. Faster-growing establishments hire slightly
more from unemployment (rather than from another employer) and relatively more females.
There is no evidence, however, that these establishments hire more workers without Ger-
man citizenship, above 50 years of age or from long-term unemployment, groups which are
considered to be disadvantaged in the labor market (see Figure 6 in Appendix A).

2.3 Recruitment Policies and Hiring Rates

The previous findings indicate that larger employment expansions go along with higher job-
filling rates. In the following we shed light on how these establishments achieve faster hiring.
In particular, we are interested in the relationship between the establishment’s hiring rate
and its wage policy, hiring standards and the search effort exerted when filling a position.
We focus on these recruitment policies as they have been separately highlighted elsewhere
as the main instruments employers have at their disposal to increase their hiring (see e.g.
Gavazza/Mongey/Violante, 2018; Kaas/Kircher, 2015; Sedlacek, 2014). We use questions in
the JVS about the last case of a hire that pertain to these aspects of the hiring policy, as well as
wage information obtained from the administrative IEB data to construct measures relating
to the employer’s wage and hiring standards policies.

IAB-Discussion Paper 15|2020 15

To investigate the relation between hiring rates and recruitment policies, we measure the
establishment’s hiring rate based on a 90-day period around the date of interview. We choose
a longer interval than for the calculation of vacancy yields (Figure 1) for two reasons: First, in
many establishments, especially in smaller ones, there are not enough hires in administrative
data during short time spans so that we cannot construct meaningful measures for wage and
hiring standards policies based on IEB data. Second, a longer interval smoothes out short-
term fluctuations and hence better reflects the establishment’s actual hiring policies at the
time the interview takes place.10

To analyze to what extent faster hiring goes along with specific recruitment policies across
establishments, we regress various recruitment policy variables on 15 bin dummies for the
establishment’s 90-day hiring rate, ranging from a mass point at zero to intervals up to 25
percent. Next to these relationships, we also consider specifications where we control for
year, establishment characteristics (industry, five size categories, and establishment age) and
job characteristics (1-digit occupation, three levels of skill requirements, dummies for long-
term experience and leadership requirements, and a dummy for a newly created job). We
show in Appendix A that our results are similar when we remove the smallest establishments
(those with less than 20 employees) or observations with zero hires from the sample. The
presence of small establishments may be a concern because they can never have small and
positive hiring rates.11

A potential concern with the recruitment information obtained from JVS data is that it re-
flects only the last case of a hire. Indeed, the underlying assumption is that the reported
recruitment behavior, especially after controlling for characteristics of the specific job, is suf-
ficiently representative of the establishment’s recruitment policy in the period under consid-
eration. Another potential concern is the extent to which measurement error pollutes the JVS
recruitment measures we use here.12 To somewhat temper these concerns, we utilize the IEB
data in order to obtain alternative measures of an establishment’s wage generosity and hir-
ing standards that are based on administrative data. With the IEB data we can construct such
measures on the basis of all new hires and existing workers at a given establishment. Below
we show that both data sets provide a very similar picture. We then use these data sets to
construct unified measures of wage generosity and hiring standards. Our measure of search
effort, however, must rely exclusively on information drawn from the JVS.

10
We also re-computed the relationships depicted in Figure 1 using 90-day intervals and find no meaningful
change in our conclusions.
11
For instance, the lowest positive hiring rate of an establishment with 20 workers is 4.9 percent.
12
Measurement error in the JVS could, for example, arise due to a recall error from the employee responding
the survey. Other potential problems can be associated to non-response issues for which appropriate weights
are provided (see Brenzel et al., 2016: for details).

IAB-Discussion Paper 15|2020 16

Figure 2: Wage generosity and hiring rates
(a) JVS - Wage Concessions (b) IEB - Wage Premium (c) JVS+IEB - Wage Generosity

Source: Own calculation.

Wage generosity

To measure the generosity of an employer’s wage policy at the hiring stage, the JVS provides
information on whether the employer had to pay more than expected to make a hire. Let
𝐽𝑉 𝑆
𝑤̂ 𝑗𝑡 denote this wage concessions variable which takes the value of one if establishment
𝑗 at time 𝑡 had to pay more than expected and zero otherwise. Figure 2.a shows the rela-
𝐽𝑉 𝑆
tionship (with and without controls) between 𝑤̂ 𝑗𝑡 and the hiring rates. It illustrates that
establishments which hire more also had to make more wage concessions.

Next we use IEB data to determine whether an employer hired workers on wages that were
larger than those predicted by a standard wage equation. Specifically, we use data on the
employment spells of all workers that were employed in one of the JVS establishments in
our sample between 2005–2018. For all prime-age (age 23 to 55), male full-time workers, we
estimate

ln 𝑤𝑖𝑡 = 𝑓𝑖 + 𝑔𝑗(𝑖) + 𝛿𝑡 + 𝛽𝑋𝑖𝑡 + 𝜂𝑖𝑡 , (2.2)

where 𝑓𝑖 denotes a worker fixed effect, 𝑔𝑗(𝑖) an establishment fixed effect, 𝛿𝑡 a time trend, 𝑋𝑖𝑡
a vector of worker observable characteristics (quadratic on experience, quadratic on tenure
and dummies for education and occupational group) and 𝜂𝑖𝑡 white noise. We define our
wage premium measure by the average residual wage of current hires in a given establish-
ment (𝐻𝑗𝑡 ):13

𝐼𝐸𝐵 1
𝑤̂ 𝑗𝑡 = ∑ 𝜂̂ .
𝐻𝑗𝑡 𝑖∈𝐻 𝑖𝑡
𝑗𝑡

13
𝐻𝑗𝑡 are all hires during the 90-day interval around the last case of hiring in the JVS as described above.

IAB-Discussion Paper 15|2020 17

The wage premium is the difference between the average wage paid to new hires at time 𝑡
and the predicted average wage that the very same workers (with the same observed and
unobserved characteristics) would normally earn in the same firm. Figure 2.b shows the re-
𝐼𝐸𝐵
lationship (with and without controls) between 𝑤̂ 𝑗𝑡 and the hiring rates. Here we observe
that establishments which hire more paid on average higher wages to their new hires rela-
𝐽𝑉 𝑆 𝐼𝐸𝐵
tive to these workers’ predicted wages. Given than 𝑤̂ 𝑗𝑡 and 𝑤̂ 𝑗𝑡 might measure different
aspects of employers’ wage policies, we construct a combined wage generosity measure 𝑤̂ 𝑗𝑡
𝐽𝑉 𝑆 𝐼𝐸𝐵
as the weighted average of the standardized values of 𝑤̂ 𝑗𝑡 and 𝑤̂ 𝑗𝑡 where we standardize
𝑤̂ 𝑗𝑡 again so that it has unit variance. Figure 2.c shows the positive relationship between 𝑤̂ 𝑗𝑡
and establishment hiring rates.14

Hiring standards

The JVS provides information on two aspects that shed light on employers’ hiring standards.
Employers are asked directly whether they eventually hired a worker whose (i) qualification
or (ii) experience is below the level usually expected for the vacant position. These are indi-
cator variables which take the value of one if the hired worker’s qualification (or experience)
matches the job requirements and zero otherwise. Figures 3.a and 3.b show the relationship
between the establishments’ hiring rates and the extent to which the worker fits the job re-
quirements in terms of qualification and experience. A negative relation implies that lowering
hiring standards goes together with higher hiring rates. Relative to those establishments with
low hiring rates, establishments with larger hiring rates apply lower hiring standards.

To complement these measures, we use the wage equation (2.2) on IEB data and define an
alternative selectivity measure as the difference between the average fixed effect of new hires
(𝐻𝑗𝑡 ) and the average fixed effect among the rest of the workforce (𝑁𝑗𝑡 ) in establishment 𝑗
at time 𝑡:
1 1
𝑠𝐼𝐸𝐵 = ∑ 𝑓𝑖 − ∑ 𝑓.
𝑗𝑡
𝐻𝑗𝑡 𝑖∈𝐻 𝑁𝑗𝑡 𝑖∈𝑁 𝑖
𝑗𝑡 𝑗𝑡

A higher value of 𝑠𝐼𝐸𝐵

𝑗𝑡 implies stricter hiring standards: establishment 𝑗 hires workers with
larger fixed effects in period 𝑡 as compared to the fixed effects of the existing workforce in this
establishment. Figure 3.c shows the relationship between this measure and the establish-
ments’ hiring rates. If one interprets the fixed effects as worker ability, then employers who
hire more also hire relatively less able workers. Figure 3.d shows the combined effect of the
standardized values of the qualification and experience mismatch variables and the selec-

14
In Appendix A we report the values of the estimated coefficients shown in Figures 2–4, many of which are
significantly different from zero at the 1 or 5 percent level. We take the reference category to be the case of a
zero hiring rate.

IAB-Discussion Paper 15|2020 18

Figure 3: Hiring standards and hiring rates

(a) JVS - No experience mismatch (b) JVS - No qualification mismatch

(c) IEB - Selectivity (d) IEB+JVS - Hiring Standards

Source: Own calculation.

tivity measure 𝑠𝐼𝐸𝐵

𝑗𝑡 when averaged to derive a single, standardized measure of employers’
hiring standards 𝑠𝑗𝑡 .

Search effort

To measure employers’ search effort in the hiring process we rely exclusively on JVS data.
Employers are asked to report the number of search channels utilized in their attempts to fill
their (last) vacancies. They were also asked about whether their search was restricted to the
local or national labor market or they extended their search to the international market. We
use answers to these questions to construct our measures of employer search effort, where
the former is computed as the number of channels and the latter is an indicator variable that
takes the value of one if the search was international and zero otherwise. Figure 4.a shows
the relationship between the number of search channels used by an establishment and its

IAB-Discussion Paper 15|2020 19

hiring rate; while Figure 4.b shows the relationship between the geographical extent of the
establishment’s search and its hiring rate. Figure 4.c then shows the combined effect of the
standardised values of these two variables after averaging them to obtain a single, standard-
ized search effort measure, 𝑒𝑗𝑡 . All these measures show that larger hiring rates goes together
with higher search effort.

Figure 4: Search effort and hiring rates

(a) JVS - No. Search Channels (b) JVS - Geographical Search (c) JVS - Search Effort

Source: Own calculation.

Relative responsiveness of the recruitment indices across establishments

The above results show clear relationships between establishments’ hiring rates and their
degree of (i) wage generosity (positive), (ii) hiring standards (negative) and (iii) search effort
(positive). Using the three standardized indices 𝑤̂ , 𝑠 and 𝑒, shown in the last graphs in Figures
2–4, we can compare their respective quantitative responses to hiring rate variation. With
the aforementioned controls taken into account, we find that the slope of the wage generos-
ity index to the hiring rate is 0.997, the slope of the hiring standards index is -0.544, and the
slope of search effort is 0.884. That is, when the hiring increases by ten percentage points,
wage generosity (search effort) goes up by 0.100 (0.088, resp.) standard deviations, and hir-
ing standards decrease by 0.054 standard deviations. Therefore, all three recruiting inten-
sity measures respond to the hiring rate, but wage generosity and search effort appear the
more responsive measures to hiring rates (in comparison to their respective overall variations
across establishments).

2.4 Vacancy Yields Across Labor Markets

After exploring the micro-level relationships between recruitment policies and hiring, we now
examine to what extent recruiting intensity matters for aggregate labor market outcomes.

IAB-Discussion Paper 15|2020 20

Specifically, we analyze how the three recruitment indices contribute to the variation of va-
cancy yields across labor markets and over time. To do so, we consider 36 labor markets
segmented by geography and skill which are based on the aforementioned three job skill re-
quirements obtained from the JVS and on 12 German regions.15 Over the period 2010–2017,
these are 288 observations (region×skill×year). We regress the vacancy yield (hires per va-
cancy) on market tightness (vacancy-unemployment ratio) and on the mean values of each
of the three standardized recruitment indices introduced above.

Table 1: Vacancy yields across labor markets

OLS (1) (2) (3) (4) (5) (6)
𝜃 - Market tightness -0.948∗∗∗ -0.856∗∗∗ -0.894∗∗∗ -0.805∗∗∗ -0.835∗∗∗ -0.845∗∗∗
(0.230) (0.227) (0.224) (0.225) (0.228) (0.225)
Search Effort 0.812∗∗∗ 0.753∗∗∗
(0.266) (0.267)
Hiring Standards -1.014∗∗∗ -0.920∗∗
(0.376) (0.376)
Wage Generosity 0.250 0.002
(0.287) (0.288)
Constant 1.972∗∗∗ 2.574∗∗∗ 2.571∗∗∗ 2.572∗∗∗ 2.537∗∗∗ 2.570∗∗∗
𝑅2 0.053 0.095 0.122 0.115 0.113 0.146
Year dum. N Y Y Y Y Y
N obs 288 288 288 288 288 288
∗∗∗
𝑝 < 0.001; ∗∗ 𝑝 < 0.05; ∗ 𝑝 < 0.10. Standard errors in parenthesis.

Source: Own calculation.

Table 1 shows the coefficients of OLS regressions. The first two columns report only the corre-
lations between labor market tightness and vacancy yields, with and without year dummies.
Columns (3) to (5) include in isolation the correlations between market-specific averages of
our three recruitment measures and the vacancy yields. Column (6) then considers the im-
pact of all recruitment measures together. We find that tighter labor markets have lower va-
cancy yields, consistent with a standard matching function. The coefficients for wage gen-
erosity and search effort are positive and the one for hiring standards is negative. They are
statistically significantly different from zero for search effort and higher standards, but not
for the wage generosity index, suggesting little variation of average wage generosity across
local labor markets.

To investigate these measures’ relative impact in explaining the variation of vacancy yields,
we compare the fit of the OLS regression across columns (3) to (5) relative to column (2). We
find that all three recruitment measures have a similar impact in increasing the 𝑅2 . Noting
that 𝜃 on its own without the year dummies (column (1)) generates an 𝑅2 = 0.053, column (6)
then suggests that together our recruitment measures contribute in explaining the variability
of vacancy yields across local markets in a similar magnitude as labor market tightness. This
shows a prominent role of recruiting intensity for matching efficiency to which we return in
Section 4. In Appendix A we also show that a similar conclusion holds when controlling for
market (i.e. skill×region) fixed effects.

15
The regions are based on the 16 states (Bundesländer) where we merge the city states Berlin, Bremen and
Hamburg, as well as Saarland to their respective neighboring states.

IAB-Discussion Paper 15|2020 21

3 The Model

We now develop a parsimonious search and matching model where firms have different mar-
gins to fill vacancies. Consistent with our empirical patterns, these margins are wage policies,
search effort, and hiring standards. In the next section we use this model to quantify the im-
pact of these margins for the variation in matching efficiency and for the effectiveness of labor
market policy.

Environment

Time is continuous and the economy is in steady state. There is measure 𝐿̄ of risk-neutral,
infinitely-lived and identical workers. There is also a unit mass of risk-neutral firms which
exit the economy at exogenous rate 𝛿. To keep the stock of firms constant, a mass 𝛿 of new
firms enter the economy per unit time. Both firms and workers maximize their respective
expected discounted value of payments, where they discount future income with common
interest rate 𝑟.

A firm is a collection of multiple projects, each of which employs multiple workers. Labor pro-
ductivity in a generic project is denoted by 𝑝 and remains constant over time. Firms face ex-
pansion opportunities as new projects become available at exogenous Poisson rate 𝜒. Firms
then draw the new project’s productivity from finite set 𝑃 ⊂ ℝ+ with probabilities 𝜋𝑝 , 𝑝 ∈
𝑃 .16 Entrant firms draw initial project productivity from the same distribution. Each project
operates under a constant-returns-to-scale technology in which labor is the only input.

A simplifying assumption is that firms only hire workers for their most recent project, while
they continue to operate their older projects with previously hired workers. Further, work-
ers in older projects cannot be shifted to newer projects in the same firm, possibly due to
the specificity of workers’ tasks in each project. This simplification captures that expanding
establishments (the focus of our paper) hire workers externally into new positions.17 It also
allows us to keep separations exogenous and hence permits a tractable characterization of
firm policies in the presence of firm-specific shocks.

At any point in time, firms decide how many workers to hire in their newest project and hence
how many vacancies to create. Opening a measure 𝑉 ≥ 0 of vacancies involves a flow cost

16
In principle the new draw of 𝑝 could be correlated with the productivity of the last project to capture possibly
persistence of the firm’s management and/or innovation capabilities. To keep the theory as parsimonious as
possible, we assume uncorrelated productivity draws.
17
Evidence in favor of this assumption is the small extent to which we observe a vacancy being filled by a
worker already employed in the same establishment opening this vacancy. In the JVS we find that the proportion
of internal hires is 6 percent.

IAB-Discussion Paper 15|2020 22

𝑐𝑉 (𝑉 ), where 𝑐𝑉 satisfies 𝑐𝑉′ > 0 and 𝑐𝑉″ > 0. Additionally, for every posted vacancy the firm
chooses search effort 𝑒 ≥ 0 at cost 𝑐𝑒 (.) with 𝑐𝑒′ > 0, 𝑐𝑒″ > 0, 𝑐𝑒 (0) = 0. Thus the total number
of “effective vacancies” opened by a firm is 𝑒𝑉 and involves total flow costs 𝑐𝑉 (𝑉 )+𝑉 ⋅𝑐𝑒 (𝑒).

We assume that only unemployed workers search for jobs.18 Upon meeting, the worker-firm
pair draws a match-specific productivity 𝑥 ∼ 𝐺(.) with support 𝑋. If the worker is hired at a
firm with current project productivity 𝑝, the flow output of the match is 𝑝 ⋅ 𝑥 for the duration
of the match. In addition to firm exit at rate 𝛿, employed workers exogenously separate from
firms into unemployment at Poisson rate 𝑠, hence the total separation rate is 𝑠 + 𝛿. While
unemployed, workers receive flow income 𝑏.

Search is competitive as in Moen (1997). Workers search for long-term contracts posted by
firms. Workers and firms understand that contracts with a higher present value of wages at-
tract more job seekers, and hence have a higher job-filling rate and a lower job-finding rate.
Unemployed workers and firms with vacant jobs then meet in submarkets that are differenti-
ated by their present values of wage payments. In a given submarket, a vacancy with search
effort 𝑒 meets a worker with flow probability 𝑒 ⋅ 𝑚(𝜆), where 𝜆 denotes the measure of work-
ers per unit of effective vacancies in the submarket, and 𝑚(.) is an increasing and concave
reduced-form matching function satisfying 𝑚(0) = 0. Flow consistency implies that a worker
in this submarket meets a firm with flow probability 𝑚(𝜆)/𝜆.

The contracts posted by firms entail a hiring threshold 𝑥̃ and constant wages (for each reali-
sation of 𝑥 ≥ 𝑥̃) denoted by 𝑤(𝑥).19 Workers observe these contract postings and choose in
which submarket to search.

Firm and Worker Decisions

Given the stationarity of the environment, standard recursive arguments imply that the ex-
pected profit value of a job with productivity 𝑝 filled with a worker with match-specific pro-
ductivity 𝑥 and earning a wage 𝑤(𝑥) is

𝑝𝑥 − 𝑤(𝑥)
𝐽 (𝑝, 𝑥, 𝑤(𝑥)) = .
𝑟+𝑠+𝛿

A firm with current project productivity 𝑝 decides the vacancy stock 𝑉 , search effort per va-
cancy 𝑒, and contract posting (𝑥,̃ 𝑤(.)), for which it expects a flow meeting rate 𝑚(𝜆) per
effective vacancy 𝑒𝑉 . The objective of the firm is to maximize the expected flow profit value

18
This assumption is motivated by the JVS evidence showing no meaningful difference in the hiring behavior
of expanding establishments with respect to the previous employment status of its new hires (see Figure 6.a).
19
Wage schedules are indeterminate in this model with risk-neutral workers and firms. This concerns both the
variation with tenure and variation with match productivity 𝑥. Limited commitment on either side of the market
restricts the set of feasible wage schedules. See Appendix B for further details.

IAB-Discussion Paper 15|2020 23

of this recruitment policy which is given by

𝑒𝑉 𝑚(𝜆) ∫𝐽 (𝑝, 𝑥, 𝑤(𝑥)) 𝑑𝐺(𝑥) − 𝑐𝑉 (𝑉 ) − 𝑉 𝑐𝑒 (𝑒) .

𝑥̃

Per unit time, the firm meets 𝑒𝑉 𝑚(𝜆) workers of which it hires all those whose match produc-
tivity exceed 𝑥̃ in which case the firm realizes the discounted profit value 𝐽 (𝑝, 𝑥, 𝑤(𝑥)). The
flow cost of this recruitment policy is 𝑐𝑉 (𝑉 ) + 𝑉 𝑐𝑒 (𝑒). Since firms operate linear production
technologies, the optimal recruitment policy depends on current project productivity 𝑝 only
and is independent of the size of the firm.

The firm understands that the meeting rate 𝑚(𝜆) varies with the terms of the posted contract
since workers choose search strategies optimally given the set of available contracts offered
by all firms. Let 𝑊 𝑒 (𝑤) denote the expected discounted income of an employed worker earn-
ing wage 𝑤, and let 𝑊 𝑢 be the expected discounted income of an unemployed worker. The
discounted surplus value of a worker can then be expressed by

𝑤 − 𝑟𝑊 𝑢
𝑊 𝑒 (𝑤) − 𝑊 𝑢 = .
𝑟+𝑠+𝛿

The value of an unemployed worker searching in a submarket with posting (𝑥,̃ 𝑤(.)) and
meeting rate 𝑚(𝜆)/𝜆 satisfies 𝑟𝑊 𝑢 = 𝑏 + 𝜌(𝑥,
̄ ̃ 𝑤, 𝜆) where the worker’s expected flow value
from search in this submarket is given by

𝑚(𝜆)
𝜌(̄𝑥,̃ 𝑤, 𝜆) ≡ ∫[𝑊 𝑒 (𝑤(𝑥)) − 𝑊 𝑢 ]𝑑𝐺(𝑥) . (3.1)
𝜆 𝑥̃

Workers decide in which submarkets to search. Given that workers are homogeneous, this
implies equal search values in all active submarkets.

Equilibrium Definition and Properties

A stationary competitive search equilibrium describes vacancies 𝑉𝑝 , search effort per vacancy
𝑒𝑝 , job postings (𝑥𝑝̃ , 𝑤𝑝 (𝑥)) ∈ 𝑍 ≡ 𝑋 × ℝ𝑋+ for all firms with current project productivity 𝑝 ∈
𝑃 , queue lengths (i.e., job seekers per effective vacancy) in submarkets for different postings,
defined by Λ ∶ 𝑍 → ℝ+ , a search value of unemployed workers 𝜌, and unemployment rate 𝑢
such that

1. Firms maximize expected profits: For all 𝑝 ∈ 𝑃 , vacancies 𝑉𝑝 , search effort 𝑒𝑝 and job
postings (𝑥𝑝̃ , 𝑤𝑝 ) solve the problem

𝑝𝑥 − 𝑤(𝑥)
max 𝑒𝑉 𝑚(𝜆) ∫ 𝑑𝐺(𝑥) − 𝑐𝑉 (𝑉 ) − 𝑉 𝑐𝑒 (𝑒) (3.2)
𝑉 ,𝑒,𝑥,𝑤,𝜆
̃ 𝑥̃ 𝑟+𝑠+𝛿

subject to 𝜆 = Λ(𝑥,̃ 𝑤).

IAB-Discussion Paper 15|2020 24

2. Workers search optimally: For all postings (𝑥,̃ 𝑤) ∈ 𝑍 and 𝜆 = Λ(𝑥,̃ 𝑤),

𝜌(̄𝑥,̃ 𝑤, 𝜆) ≤ 𝜌 , 𝜆 ≥ 0, (3.3)

with complementary slackness (choice of submarkets). Furthermore,

∑ 𝜋𝑝 𝑉𝑝 𝑒𝑝 𝜆𝑝 ≤ 𝑢𝐿̄ , 𝜌 ≥ 0, (3.4)
𝑝∈𝑃

with complementary slackness (labor market participation).

3. Stationary unemployment (stock-flow consistency):

̄ + 𝛿) = ∑ 𝜋𝑝 (1 − 𝐺(𝑥𝑝̃ ))𝑚(𝜆𝑝 )𝑒𝑝 𝑉𝑝 .

(1 − 𝑢)𝐿(𝑠 (3.5)
𝑝∈𝑃

Optimal search requires that workers receive the same expected search value in all submar-
kets which they visit (𝜆 > 0) which is entailed in the complementary-slackness condition 3.3.
It further necessitates that unemployed workers search in some submarket if they can ob-
tain positive surplus, 𝜌 > 0; otherwise unemployed workers are indifferent between search
and inactivity. This is specified in the complementary-slackness condition 3.4 where the left-
hand side is aggregate unemployment (𝑉𝑝 𝑒𝑝 𝜆𝑝 unemployed workers search for employment
in firms with current productivity 𝑝 which constitute measure 𝜋𝑝 ) and the right-hand side is
aggregate non-employment. Condition 3.5 says that unemployment inflows (= separations,
left-hand side) are equal to outflows (= hires, right-hand side).

Conditions 3.4 and 3.5 can be combined to

𝐻𝑝
∑ 𝜋𝑝 ( + 𝑉𝑝 𝑒𝑝 𝜆𝑝 ) ≤ 𝐿̄ , (3.6)
𝑝∈𝑃
𝑠+𝛿

where 𝐻𝑝 = (1−𝐺(𝑥𝑝̃ ))𝑚(𝜆𝑝 )𝑒𝑝 𝑉𝑝 is the flow of hires of firms with current project productiv-
ity 𝑝. 𝐻𝑝 /(𝑠 + 𝛿) is aggregate employment in all projects with productivity 𝑝, and 𝑉𝑝 𝑒𝑝 𝜆𝑝 are
unemployed workers searching for jobs at firms with current project productivity 𝑝. Hence in-
equality 3.6 says that employment and unemployment together do not exceed the measure
of workers 𝐿̄, and they are equal to 𝐿̄ if all non-employed workers search which is the case
if the expected value of search is positive, 𝜌 > 0. In this case, 𝜌 is implicitly pinned down by
equation 3.6, hence it depends on labor demand (i.e., the distribution of vacancies, search
effort and hiring standards) as well as on labor supply 𝐿̄. Any change of aggregate market
conditions, for instance a uniform increase of productivity across all projects, changes the
equilibrium values of 𝑉𝑝 , 𝑒𝑝 , 𝑥𝑝̃ and 𝜆𝑝 , and therefore impacts the search value 𝜌.20

20
Using standard arguments, it can be verified that the competitive search equilibrium is constrained efficient.
That is, vacancies, search effort, hiring thresholds and the allocation of workers and effective vacancies across
submarkets maximize the discounted value of aggregate output.

IAB-Discussion Paper 15|2020 25

Because of 𝑐𝑒 (0) = 0 = 𝑚(0), firms will either not hire and choose 𝑒 = 𝜆 = 0, or they aim
to attract 𝜆 = Λ(𝑥,̃ 𝑤) > 0 job seekers per effective vacancy. In the latter case, posted wages
must satisfy

𝑚(𝜆) 𝑤(𝑥) − 𝑏 − 𝜌
∫ 𝑑𝐺(𝑥) = 𝜌 (3.7)
𝜆 𝑥̃ 𝑟+𝑠+𝛿

to make sure that unemployed workers are attracted to these vacancies, see condition 3.3
together with 3.1.

The job-filling rate for a firm with project productivity 𝑝 is

𝐻𝑝
𝑞𝑝 ≡ = 𝑒𝑝 ⋅ 𝑚(𝜆𝑝 ) ⋅ (1 − 𝐺(𝑥𝑝̃ )) . (3.8)
𝑉𝑝

Variation in job-filling rates are accounted for by three factors: search effort 𝑒, wages as re-
flected through 𝜆, and hiring standards as measured by the threshold 𝑥.̃

Firm Dynamics

In the cross-section of firms, job-filling rates and recruitment policies vary by productivity 𝑝.
They can be related to firms’ employment growth and hiring rates, thus generating the the-
oretical counterparts of the empirical relationships identified in the previous section. The
dynamics of firms is driven by two forces: (i) new firms enter with flow probability 𝛿, and (ii)
existing firms draw new project productivities with flow probability 𝜒. In both cases firms ad-
just their workforce, but they do not do so instantaneously due to convex vacancy and search
effort costs.

While a firm’s hires flow depends on the productivity of the current project, the separation
rate is constant. Thus, employment in a firm with project productivity 𝑝 and size 𝑁 adjusts
according to
𝑁̇ = 𝐻𝑝 − 𝑠𝑁 .

Therefore, the firm’s employment growth rate 𝑁̇ /𝑁 varies with the hiring rate 𝐻𝑝 /𝑁 accord-
ing to 𝑁̇ /𝑁 = 𝐻𝑝 /𝑁 − 𝑠. The cross-sectional relationships between firm growth 𝑁̇ /𝑁 ,
hiring rates 𝐻𝑝 /𝑁 , vacancy rates 𝑉𝑝 /𝑁 and job-filling rates 𝑞𝑝 depend on the joint distribu-
tion of project productivity 𝑝 and employment 𝑁 . Write Ψ𝑝 (𝑁 ) for the cumulative distri-
bution of firms by employment size, conditional on current project productivity 𝑝, and let
Ψ(𝑁 ) ≡ ∑𝑝∈𝑃 𝜋𝑝 Ψ𝑝 (𝑁 ) be the mass of firms with employment less than or equal to 𝑁 . In
steady state, these distributions satisfy

𝛿(1 − Ψ𝑝 (𝑁 )) + 𝜒(Ψ(𝑁 ) − Ψ𝑝 (𝑁 )) = Ψ′𝑝 (𝑁 )(𝐻𝑝 − 𝑠𝑁 ) , (3.9)

IAB-Discussion Paper 15|2020 26

for all 𝑝 ∈ 𝑃 and 𝑁 ≥ 0.21 This system of differential equations can be solved subject to the
boundary conditions Ψ𝑝 (0) = 0 and Ψ𝑝 (𝑁̄ ) = 1, where 𝑁̄ = 𝐻𝑝̄ /𝑠 is the employment that a
firm with maximal productivity 𝑝̄ = max{𝑝 ∈ 𝑃 } would reach in the absence of shocks.22

Characterization of Recruitment Policies

Substitute 3.7 into 3.2 to rewrite the firm’s problem:

𝑝𝑥 − 𝑏 − 𝜌
max 𝑉 ⋅ {𝑒𝑚(𝜆) ∫ 𝑑𝐺(𝑥) − 𝑒𝜆𝜌 − 𝑐𝑒 (𝑒)} − 𝑐𝑉 (𝑉 ) . (3.10)
𝑉 ,𝑒,𝑥,𝜆
̃ 𝑥̃ 𝑟+𝑠+𝛿

The first-order conditions are

𝑝𝑥̃ = 𝑏 + 𝜌 , (3.11)
𝑝𝑥 − 𝑏 − 𝜌
𝑐𝑒′ (𝑒) = 𝑚(𝜆) ∫ 𝑑𝐺(𝑥) − 𝜆𝜌 , (3.12)
𝑥̃ 𝑟 + 𝑠 + 𝛿
𝑝𝑥 − 𝑏 − 𝜌
𝜌 = 𝑚′ (𝜆) ∫ 𝑑𝐺(𝑥) , (3.13)
𝑥̃ 𝑟 + 𝑠 + 𝛿
𝑝𝑥 − 𝑏 − 𝜌
𝑐𝑉′ (𝑉 ) = 𝑒𝑚(𝜆) ∫ 𝑑𝐺(𝑥) − 𝑒𝜆𝜌 − 𝑐𝑒 (𝑒) . (3.14)
𝑥̃ 𝑟 + 𝑠 + 𝛿

Equation 3.11 says that job surplus is zero for the worker who is hired at the margin. This
condition implies a negative relationship between the firm’s project productivity 𝑝 and the
hiring threshold 𝑥.̃ Combining 3.12 and 3.13 gives

𝑚(𝜆) − 𝜆𝑚′ (𝜆)

𝑐𝑒′ (𝑒) = 𝜌 , (3.15)
𝑚′ (𝜆)

which implies that the queue length 𝜆 (and hence wage offers) and search effort 𝑒 are posi-
tively related in the cross-section of firms. Conditions 3.11 and 3.13 give rise to

𝑏+𝜌 𝑥
𝜌 = 𝑚′ (𝜆) ∫ − 1 𝑑𝐺(𝑥) . (3.16)
𝑟 + 𝑠 + 𝛿 𝑥̃ 𝑥̃

This equation says that across firms worker queues 𝜆 and hiring thresholds 𝑥̃ are negatively
related. In other words, firms which are less selective in hiring also pay higher wages to work-

21
Consider the mass of firms with employment up to 𝑁 and project productivity 𝑝, which is 𝜋𝑝 Ψ𝑝 (𝑁). The
inflow into this group is 𝛿𝜋𝑝 + 𝜒𝜋𝑝 Ψ(𝑁) + 𝜋𝑝 Ψ′𝑝 (𝑁) max(0, 𝑠𝑁 − 𝐻𝑝 ) (i.e. entrants plus firms drawing
new productivity 𝑝 plus firms contracting in size just above 𝑁). The outflow of this group is 𝛿𝜋𝑝 Ψ𝑝 (𝑁) +
𝜒𝜋𝑝 Ψ𝑝 (𝑁) + 𝜋𝑝 Ψ′𝑝 (𝑁) max(0, 𝐻𝑝 − 𝑠𝑁) (i.e. exits plus firms drawing new productivity plus firms growing
in size just below 𝑁). Equating inflows and outflows and canceling 𝜋𝑝 gives equation 3.9.
22
Ψ𝑝 (.) may not be differentiable at 𝑁 = 𝐻𝑝 /𝑠 which complicates the numerical solution of this system
of differential equations. We obtain a numeric solution by solving for the invariant distribution of the Markov
process describing the dynamics of firms over discrete time intervals 𝑑𝑡 on finite state space 𝑃 × 𝑁 where 𝑁
is a discrete grid of [0, 𝑁̄ ].

IAB-Discussion Paper 15|2020 27

ers with similar productivity. Finally, substitute 3.12 into 3.17 to obtain

𝑐𝑉′ (𝑉 ) = 𝑒𝑐𝑒′ (𝑒) − 𝑐𝑒 (𝑒) . (3.17)

This condition implies that search effort 𝑒 and vacancies 𝑉 are positively related across firms.

Therefore, we can conclude that firms with higher current project productivity 𝑝 (i) post more
vacancies, (ii) are willing to accept lower hiring standards, (iii) exert higher search effort, and
(iv) set wages so as to attract more workers.23 To the extent that project productivity 𝑝 is the
only source of heterogeneity between firms (as assumed in this model), all three factors in
equation 3.8 which contribute to job-filling rates 𝑞𝑝 are positively correlated: Firms with more
productive projects have higher search effort 𝑒𝑝 , a higher meeting rate per effective vacancy
𝑚(𝜆𝑝 ) and a larger hiring probability conditional on a meeting, 1 − 𝐺(𝑥𝑝̃ ).24 The respective
percentage contributions to the variation of job-filling rates can be written

𝑑𝑞 𝑑𝑒 𝑚′ (𝜆)𝜆 𝑑𝜆 𝐺′ (𝑥)̃𝑥̃ 𝑑𝑥̃

= + ⋅ − ⋅ . (3.18)
𝑞 𝑒 𝑚(𝜆) 𝜆 1 − 𝐺(𝑥)̃ 𝑥̃

Using the policy functions derived above, this can be further decomposed

𝑑𝑞 𝑑𝑝 1 (1 − 𝜀Φ,𝑥̃ )𝜀𝑚,𝜆 𝐺′ (𝑥)̃𝑥̃

= (1 − 𝜀Ψ,𝑥̃ ){ + + }, (3.19)
𝑞 𝑝 (1 −
⏟⏟ 𝜀𝑚,𝜆 )𝜀⏟⏟
⏟⏟⏟ 𝑐𝑒′ ,𝑒 −𝜀𝑚′ ,𝜆⏟⏟ ⏟⏟⏟⏟⏟⏟⏟⏟⏟
⏟⏟⏟⏟⏟ (1 − 𝐺(𝑥))(1
̃ − 𝜀Ψ,𝑥̃ )
=search effort =wages =hiring standards

where 𝜀𝑓,𝑧 denotes the elasticity of a function 𝑓 with respect to variable 𝑧, and Ψ(𝑥)̃ ≡ ∫𝑥̃ 𝑥 −
𝑥̃ 𝑑𝐺(𝑥). This decomposition shows how the functional forms of the matching function 𝑚,
the search cost function 𝑐𝑒 , and the distribution of match-specific productivity 𝐺 determine
the respective contributions of search effort, wages and hiring standards for the overall re-
cruiting intensity of firms.

23
This generalizes Kaas/Kircher (2015) who show that firms use both more vacancy postings and higher wage
offers when they hire faster.
24
This feature is consistent with what we find in JVS data: Establishments that exert more search effort also
have lower hiring standards and pay more generous wages.

IAB-Discussion Paper 15|2020 28

4 Quantitative Analysis

How does recruitment behavior contribute to the cross-sectional variation of matching effi-
ciency? Does recruiting intensity matter for the impact of labor market policy? To answer
these questions, we parameterize our model and calibrate its parameters to match selected
statistics of the German labor market and the evidence presented above.

We explore variation across different local labor markets which are segmented in the same
way as in Section 2. That is, we consider 12 regions (i.e. German states where smaller states
are merged to neighboring states) and three skill levels (no formal education, vocational train-
ing, and college degree) which gives rise to 36 labor markets. We believe that these labor mar-
kets are sufficiently segmented so that we can safely abstract from mobility across them.25
We further abstract from complementarities in production between different skill groups.
With these assumptions, our model describes a given local labor market. Most of the model
parameters are calibrated uniformly for all local markets, while others are market-specific in
order to capture the observed cross-sectional variation in unemployment rates, job-finding
rates and wages.

All data targets are based on averages over the period 2010–2017 where we obtain employ-
ment, unemployment, vacancies, the number of establishments (employing workers of the
given skill), monthly unemployment-to-employment (UE) flows and the mean wage for all
markets. We measure the job-finding rate as the monthly UE flow divided by the unemploy-
ment stock. To have a model-consistent measure of the vacancy yield, we define the vacancy
yield as hires from unemployment (UE flow) divided by the vacancy stock. Figure 5 shows
the relationship between labor market tightness (vacancies divided by unemployment), job-
finding rates and vacancy yields across the 36 labor markets. Labor markets for low-skilled
workers are less tight than labor markets for medium- and high-skilled workers, and these
markets have lower job-finding rates and higher vacancy yields. Likewise, there are increas-
ing (decreasing) relationships between tightness and the job-finding rate (vacancy yield) across
regions. In principle, these patterns are consistent with a standard reduced-form matching
function uniformly applied for all labor markets (plus noise). We use our model to explore to
what extent variation in the recruitment policies amplifies or mitigates these empirical rela-
tionships.

25
In particular, most metropolitan areas are contained one of the 12 regions. Moreover, the skill groups are
based on education acquired early in life so that workers usually do not move between them. The reported
vacancies in the JVS are differentiated according to the same classification.

IAB-Discussion Paper 15|2020 29

Figure 5: Market tightness, job-finding rates and vacancy yields in 36 (region×skill) labor markets
in Germany (2010–2017)

Source: Own calculation.

4.1 Calibration Strategy

We set a month as our unit time and let the matching function follow a Cobb-Douglas speci-
fication, 𝑚0 𝜆𝜇 with 𝜇 ∈ (0, 1). The recruitment and vacancy cost functions are given by 𝑐𝑒 𝑒𝛾
and 𝑐𝑉 𝑉 Φ with elasticity parameters 𝛾 > 1 and Φ > 1. Match-specific productivity is as-
sumed to be Pareto distributed, 𝐺(𝑥) = 1 − (𝑥0 /𝑥)𝛼 for 𝑥 ≥ 𝑥0 , where 𝛼 > 1, while project
productivities are distributed with cumulative distribution Π(𝑝) = (𝑝/𝑝)̄𝜂 for 𝑝 ∈ [0, 𝑝̄], with
𝜂 > 0.26 Our parameterization ensures that all firms face a non-trivial selection decision. That
is, the bounds on the two productivity distributions must be set such that hiring thresholds
̄ 0 < 𝑏 + 𝜌. These functional forms are convenient
are interior for all firms, which requires 𝑝𝑥
as they imply that the firms’ policies 𝑥𝑝̃ , 𝜆𝑝 , 𝑉𝑝 and 𝑒𝑝 , as well as several aggregate model
statistics (in particular, means and standard deviations of various outcome variables) can be
all obtained in closed form (see Appendix B for details).

We choose a calibration strategy where only few parameters are set specific for each labor
market, indexed by 𝑚 = 1, … , 36, while the other parameters are shared by all labor mar-
kets. Market-specific parameters are 𝐿̄𝑚 (labor force in relation to the number of establish-
ments), 𝑠𝑚 and 𝛿𝑚 (separations in continuing and exiting firms), 𝑝𝑚 ̄ (upper bound of the
productivity distribution) and 𝑏𝑚 (unemployment income). 𝐿̄𝑚 is set directly to the corre-
sponding data value. The total separation rate is set to match the steady-state unemploy-
ment rate 𝑢𝑚 in market 𝑚. If 𝑓𝑚 is the job-finding rate in this market, stock-flow consistency
𝑢𝑚
implies 𝑠𝑚 + 𝛿𝑚 = 1−𝑢 𝑓𝑚 . In all markets, we attribute one-third of separations to exits and
𝑚
two-thirds to separations for continuing establishments, consistent with Fuchs/Weyh (2010)

26
While a discrete distribution simplifies notation in the previous section, we assume a particular functional
form of a continuous distribution here in order to obtain closed-form expressions for many outcome variables
which simplifies the algebra.

IAB-Discussion Paper 15|2020 30

who find that one third of destroyed jobs in the German labor market are at exiting establish-
ments.

̄ and 𝑏𝑚 are set to match average wages and job-finding

Given all other model parameters, 𝑝𝑚
rates in market 𝑚. Here we can utilize the closed-form expressions obtained in Appendix B.
Specifically, the mean wage in market 𝑚 is

𝛼+𝜇−1
𝑤̄ 𝑚 = (𝑏𝑚 + 𝜌𝑚 ) , (4.1)
𝛼−1
and the job-finding rate is

𝜌𝑚 (𝑟 + 𝑠𝑚 + 𝛿𝑚 )(𝛼 − 1)
𝑓𝑚 = , (4.2)
𝜇(𝑏𝑚 + 𝜌𝑚 )

where 𝜌𝑚 is the value of workers’ search, an endogenous variable defined in Section 3. With
(𝑤̄ 𝑚 , 𝑓𝑚 ) set to their data values, 4.1 and 4.2 are solved uniquely for 𝑏𝑚 and 𝜌𝑚 . Then, the
closed-form expressions for aggregate unemployment 𝑈𝑚 and aggregate employment 𝐸𝑚 =
𝐻𝑚 /(𝑠𝑚 + 𝛿𝑚 ) in market 𝑚 (see Appendix B) are used to solve the aggregate resource con-
dition 𝑈𝑚 + 𝐸𝑚 = 𝐿̄𝑚 for the upper bound of productivity 𝑝𝑚 ̄ in market 𝑚. Intuitively,
higher productivity 𝑝𝑚 ̄ increases the demand for labor in market 𝑚 (more vacancies and
higher recruiting intensity) which raises the job-finding rate and the workers’ search value.
Formally, 𝑓𝑚 increases in 𝜌𝑚 which itself increases in 𝑝𝑚 ̄ . Therefore, job-finding rates and
wages uniquely identify 𝑏𝑚 and 𝑝𝑚 ̄ .

The remaining parameters are shared by all labor markets. The interest rate 𝑟 = 0.34 percent
corresponds to an annual real interest rate of 4 percent. The matching function elasticity 𝜇
(together with the Pareto parameter 𝛼) controls the level of wages relative to unemployment
income, see equation 4.1. Given a value for 𝛼, 𝜇 can be set directly to match an average re-
placement rate of 46 percent, consistent with the level of unemployment income after the
Hartz labor market reforms (cf. Krebs/Scheffel, 2013). Utilizing the functional form for ag-
gregate vacancies in Appendix B, the scale of the vacancy cost function 𝑐𝑉 can also be set
directly to match the average number of vacancies per establishments, given all other model
parameters.

Three further global parameters 𝑥0 (lower bound of match productivity), 𝑐𝑒 (search effort
scale parameter), and 𝑚0 (matching function scale parameter) cannot be identified sepa-
̄ . This is because all model statistics (unemployment,
rately from the scale of productivity 𝑝𝑚
𝛾
1−𝜇
vacancies, hires, etc.) depend on the product 𝑐𝑒−1 (𝑚0 𝑥𝛼 ̄𝛼 )
0 𝑝𝑚 . This implies that any change
in the parameters 𝑥0 , 𝑐𝑒 and 𝑚0 would scale up or down the productivity parameters 𝑝𝑚 ̄ in
the same proportion in all local markets. For the same reason, the global values of 𝑥0 , 𝑐𝑒 and
𝑚0 do not matter for any of the decomposition results that we present below; hence their

IAB-Discussion Paper 15|2020 31

values can be normalised without impacting our results.27

This leaves five global parameters to be jointly estimated: the elasticities of search costs and
vacancy costs, 𝛾 > 1 and Φ > 1, the Pareto shape parameter 𝛼 > 1 for match-specific
productivity, the shape parameter of the project productivity distribution 𝜂 > 0, and the
arrival rate of project productivity shocks 𝜒.

Parameters 𝛾 and 𝛼 determine in which proportion firms use search effort, wages, and hiring
standards to increase their job-filling rate. This is a consequence of decomposition 3.19 which
shows how variation of job-filling rates (by project productivity) is decomposed into the three
recruiting margins. This decomposition crucially responds to the elasticities of match pro-
ductivity, search costs, and the matching function. The latter elasticity is already calibrated
from 4.1 to match the average replacement rate. We calibrate 𝛾 and 𝛼 to reflect the relative
variation of standardized recruitment indices 𝑤̂ , 𝑠 and 𝑒, as shown in the last graphs of Figures
2–4 in Section 2. To generate outcome variables comparable to those in the data, we simulate
the model for a sample of firms over a 90-day hiring period in each of the 36 labor markets
and then use the three factors in decomposition 3.8, observed in the middle of this period,
for the respective contributions of effort (𝑒𝑝 ), wage generosity (𝑚(𝜆𝑝 )) and hiring standards
(𝐺(𝑥𝑝̃ )). Then, we standardize all three model-generated outcome variables (uniformly for all
36 markets) and calculate averages of the standardized indices for each of 15 bins of 90-day
hiring rates ranging from 0 to 30 percent. Based on those 15 model-generated data points for
each index, we calculate the slope of every index with respect to the hiring rate. Our empiri-
cal results suggest that the standardized wage index reacts somewhat stronger than the stan-
dardized effort index (with relative slope 1.127), whereas the standardized hiring index reacts
less than the effort index (relative slope -0.615). Our model targets these relative slopes.28

The convexity parameter of vacancy costs Φ controls to what extent firms use vacancy post-
ings to increase their hiring rate. Larger values of Φ make highly productive firms less willing
to post more vacancies and rather resort to increase their vacancy yield (cf. Kaas/Kircher,
2015; Gavazza/Mongey/Violante, 2018; Kettemann/Mueller/Zweimueller, 2018). That is, pa-
rameter Φ controls the slope of the hockey-stick relationship between firm growth and the
vacancy yield. To obtain this slope in the model, we again simulate a cross-section of firms
over 30-day intervals in all 36 labor markets and calculate averages of vacancy yields in each
of 15 bins of firm growth rates ranging from 0 to 30 percent. The slope of the vacancy yield-
growth relation is then targeted to the one observed in the data as shown in Figure 1.d based

27
See Appendix B for details and further discussion.
28
Given that all variation of recruitment indices and hires in the model comes from differences in firm produc-
tivity (within a market) or from differences in market-specific parameters (across markets), our model generates
too much variability of the three indices with hiring rates as compared to those observed in Figures 2–4. There-
fore we cannot target the absolute slopes of the relationships between recruitment indices and hiring rates.
Nonetheless, most of the variation in the model (and in the data) takes place within local labor market (see the
comparison below).

IAB-Discussion Paper 15|2020 32

on the averages not controlled for firm size (11.5).

Finally, the two parameters for the productivity distribution 𝜂 (shape of the density) and 𝜒
(arrival rate of productivity shocks) matter for the frequency and size of the firms’ employ-
ment adjustments. We target that 80 percent of establishments have monthly employment
growth rates in the interval [−0.01, +0.01] and 3.6 percent of establishments grow by more
than 10 percent.

4.2 Fit of the Model

Table 2 shows the values of calibrated parameters and calibration targets. The bottom five
rows of the table compare how the model matches the data targets used for estimation of
the last five parameters. All other data targets are matched exactly since they identify the
corresponding parameters uniquely, as described above. The model fit is rather good, with
the exception of the share of monthly employment growth rates above 10 percent which is
somewhat underestimated by the model. Besides capturing the slope of the vacancy yield
with respect to employment growth, our model also generates the hockey-stick relationships
between hiring rates and establishment growth (Figure 1.b) and, by implication, a moderate
variation of the vacancy rate.

In terms of non-targeted moments, the model also does well in several dimensions. Based
on Monte Carlo simulations for each local labor market, we construct standardized indices
for search effort, wage generosity and hiring standards as described in the previous subsec-
tion. Three key features stand out. First, similar to their empirical counterparts, we find that
in the model most of the variation of these indices happens within local labor markets. Pre-
cisely, a variance decomposition reveals that the between-market component accounts for
only 0.2 percent (effort), 1.0 percent (wage generosity) and (3.0 percent) of the total variance
in the model. In the data, the between-market variance is also rather small (0.4 percent–1.0
percent).

Table 3 shows how local-market averages of job-finding rates and vacancy yields correlate
with market tightness and the three standardized recruitment indices, all of them averaged
for each local labor market. Here the model shows that job-finding rates correlate positively
with labor market tightness, search effort and hiring standards, in line with the data. Likewise,
both in the data and in the model, the vacancy yield correlates negatively with tightness and
hiring standards while the correlation with search effort is zero in the data and small in the
model. On the other hand, the model does not reproduce the weak correlations between
wage generosity, job-finding rates and vacancy yields that we observe in the data.29

29
Note again that our model only targets (and perfectly matches) the job-finding rates in all labor markets,
but it does not target the cross-market variation of any of the other variables specified in Table 3. However, all

IAB-Discussion Paper 15|2020 33

Table 2: Calibrated parameters and targets used for estimation

Market-specific parameters
Parameter Mean Value Explanation/Target
Labor force (normalized) 𝐿̄ 𝑚 7.1 Workers per establishment
Separation rate 𝑠𝑚 0.54% Unemployment rates
Exit rate 𝛿𝑚 0.27% 1/3 of separations due to exit
Productivity upper bound 𝑝̄𝑚 1045.5 Job-finding rates
Unemployment income 𝑏𝑚 0.38 Wages (mean normalized to 1)
Global parameters (directly calibrated)
Parameter Value Explanation/Target
Interest rate 𝑟 0.34% 4% annual real rate
Vacancy cost scale 𝑐𝑉 515,257 0.12 vacancies per establishment
Matching fct. elasticity 𝜇 0.054 Average replacement rate 46%
Matching fct. scale 𝑚0 0.01 Normalized (see text)
Search effort scale 𝑐𝑒 1.0 Normalized (see text)
Match prod. Pareto scale 𝑥0 0.01 Normalized (see text)
Global parameters (estimated)
Parameter Value Explanation/Target
Vacancy cost elasticity Φ 10.25 Slope vacancy yield wrt emp. growth
Search effort elasticity 𝛾 7.86 Relative slope wages/effort
Match prod. Pareto shape 𝛼 1.97 Relative slope hiring standards/effort
Arrival rate prod. shocks 𝜒 0.34 Employment growth [−0.01, 0.01]
Productivity shape 𝜂 0.15 Employment growth > 10%
Targets for estimation
Statistics Data Model
Relative slope wages/effort 1.13 1.13
Relative slope hiring standards/effort -0.62 -0.62
Slope vacancy yield wrt emp. growth 11.5 11.3
Share employment growth [−0.01, 0.01] 0.80 0.81
Share employment growth > 0.1 0.036 0.007

Source: Own calculation.

To compare to what extent all three recruitment indicators affect vacancy yields, we regress
the vacancy yield on tightness, search effort, hiring standards and wage generosity. The re-
gression coefficients that we obtain are smaller than those obtained in the data (see speci-
fication (6) in Table 1), but the relative order is similar. Hiring standards have the strongest
(negative) relation to the vacancy yield (−0.437 compared to −0.920 in Table 1), followed by
search effort (0.148 compared to 0.75). Wage generosity has the smallest impact on vacancy
yields in the data and in the model (0.056 compared to 0.002).

4.3 Variation of Matching Efficiency

We now analyze how recruiting intensity contributes to the variation of matching efficiency
across local labor markets. We do not explore variation over time because our model is set in
steady state and the period in which our data are obtained (2010-2017) is rather short.

model-generated variables correlate positively with their data counterparts, with the only exception of search
effort where the correlation is zero.

IAB-Discussion Paper 15|2020 34

Table 3: Cross-market correlations
Data Model
Job-finding rate Vacancy yield Job-finding rate Vacancy yield
Job-finding rate 1.0 -0.789 1.0 -0.593
Vacancy yield -0.789 1.0 -0.593 1.0
Tightness 0.808 -0.750 0.804 -0.843
Search effort 0.393 0.004 0.769 -0.215
Hiring standards 0.414 -0.369 0.627 -0.997
Wage generosity 0.042 0.129 -0.896 0.865

Source: Own calculation.

Our calibrated model permits an exact decomposition of matching efficiency. Since aggre-
gate hires in a labor markets are 𝐻 = ∫ 𝐻𝑝 𝑑Π(𝑝) = ∫(1 − 𝐺(𝑥𝑝̃ ))𝑚(𝜆𝑝 )𝑒𝑝 𝑉𝑝 𝑑Π(𝑝), the
job-finding rate in this market can be decomposed as follows:30

𝐻 𝑉 ̄ 1−𝜇 𝑚̄ 𝑚(𝜆𝑝 )𝑒𝑝 𝑉𝑝

= 𝑚0 ( ) ⋅ 𝑒1−𝜇
̄ ⋅ ⋅ ∫(1 − 𝐺(𝑥𝑝̃ )) 𝑑Π(𝑝)
𝑈 ⏟⏟⏟ 𝑈 ⏟⏟ ⏟ ⏟̄
𝑚(𝜆) ⏟⏟⏟⏟⏟⏟⏟⏟⏟⏟⏟⏟⏟⏟⏟ 𝑚̄𝑒𝑉̄ ̄
Tightness ≡ 𝑚𝐸 ≡ 𝑚𝑊 ≡ 𝑚𝑆
Search effort Wage dispersion Selectivity
(4.3)

where
𝑉𝑝 𝑒𝑝 𝑉𝑝 𝑈
𝑉 ̄ ≡ ∫ 𝑉𝑝 𝑑Π(𝑝) , 𝑒 ̄ ≡ ∫ 𝑒𝑝 𝑑Π(𝑝) , 𝑚̄ ≡ ∫ 𝑚(𝜆𝑝 ) 𝑑Π(𝑝) and 𝜆̄ ≡ .
𝑉̄ 𝑒̄𝑉 ̄ 𝑒𝑉̄ ̄

𝑉 ̄ are aggregate vacancies, 𝑒̄ is a vacancy-weighted aggregate measure of search effort, and

𝑚̄ is an average of the worker-firm meeting rate weighted by effective vacancies 𝑒𝑉 . 𝜆̄ is the
inverse of effective labor market tightness (i.e. unemployment divided by effective vacan-
cies).

Equation 4.3 shows how the job-finding rate depends on four factors. The first one is the stan-
dard matching function which links labor market tightness (i.e. the vacancy-unemployment
ratio) to matches per job seeker, an increasing and concave relationship. The other three
factors contribute to matching efficiency: 𝑚𝐸 measures the contribution of search effort to
matching efficiency, 𝑚𝑆 captures the contribution of selectivity and 𝑚𝑊 is a “wage disper-
sion” term which reflects different wage policies in heterogenous firms.31 The numerator 𝑚̄

30
Multiplication of this equation by 𝑈/𝑉 ̄ delivers an equivalent decomposition of the vacancy yield in the def-
inition of this section (hires from unemployment per vacancy). We report the decomposition of the job-finding
rate since our model targets this outcome variable and since it is especially of interest for the policy experiment
of the next subsection.
31
Note that the three terms 𝑚𝐸 , 𝑚𝑊 and 𝑚𝑆 are different from the recruitment indices that we construct
earlier (based on Monte-Carlo simulations mimicking their data counterparts, see subsection 4.1). However,
𝑚𝐸 correlates positively with the search effort index, and 𝑚𝑆 correlates negatively with the hiring standards
index (i.e. there are less matches if hiring standards are stricter). Since the cross-market variance of 𝑚𝑊 is zero,
it does not correlate with the wage generosity index.

IAB-Discussion Paper 15|2020 35

is a weighted measure of worker-firm meetings, whereas the denominator 𝑚(𝜆)̄ is the meet-
ing rate at average effective market tightness 𝜆̄. If wage policies in all firms were identical
(𝜆𝑝 = 𝜆̄), 𝑚𝑊 would be exactly equal to one. If wage policies differ, this term is smaller than
one due to the strict concavity of the matching function (Jensen’s inequality). Thus, disper-
sion of wages (in a competitive search model) reduces matching efficiency (cf. Kaas/Kircher,
2015). In our calibrated model, only 𝑚𝐸 and 𝑚𝑆 vary across local labor markets, but 𝑚𝑊 is
constant and equal to 0.93. That is, wage dispersion reduces matching efficiency, but it does
so uniformly across labor markets. This implication is to a large extent consistent with our
data, where we find little cross-market variation of measured wage dispersion.32

We can now explore to what extent labor market tightness, search effort and selectivity con-
tribute to variation of job-finding rates across labor markets. The variance of the (log) job-
finding rate is 0.184. Table 4 shows the covariance matrix of all (log) terms in 4.3 with the ex-
ception of 𝑚𝑊 as it is constant across markets. Most of the variation of the total job-finding
rate comes from labor market tightness and from selectivity. Variation of search effort plays
only a minor role. Note that the selectivity term 𝑚𝑆 correlates negatively with tightness. In
other words, firms in tighter labor markets are more selective which reduces matching effi-
ciency.

Table 4: Covariances across local labor markets

Total variance 0.184 Tightness Search effort Selectivity

Tightness 0.689 0.018 -0.395
Search effort 0.018 0.002 -0.006
Selectivity -0.395 -0.006 0.259

Note: Covariance matrix of logged variables. Summation over all terms adds up to the variance of the logged
job-finding rate (0.184). Source: Own calculation.

These observations are also reflected in Table 5 whose first row shows the contribution of
the three terms to the total cross-market variance of the job-finding rate. Across all 36 labor
markets, market tightness and hiring selectivity are the two dominant forces in accounting
for the variation of job-finding rates. However, these two forces work against each other:
tighter labor markets have more selective firms, which then dampens the job-finding rate.
Note that this finding is consistent with Table 3 which shows that job-finding rates and the
hiring-standards index are positively correlated (both in the data and in the model). Finally,
search effort 𝑚𝐸 has a positive, but quantitatively small impact on variation of job-finding
rates.

The intuition why hiring standards reduce matching efficiency in tighter markets is as fol-

32
When computing the coefficient of variation for (log) wages in each market we find that cross-market differ-
ences in this coefficient are small. The standard deviation of the distribution of market-specific coefficients of
variation is 0.03. When controlling for skill levels we find that among the low-skill markets the standard devia-
tion is 0.01, while for medium- and high-skill markets the standard deviation is 0.0045 and 0.0068, respectively.

IAB-Discussion Paper 15|2020 36

Table 5: Relative contributions to the variation of job-finding rates across local labor markets

Variance JFR Tightness Search effort Selectivity

Total 0.184 169.6% 7.3% -76.9%
Low skill 0.059 150.1% 2.4% -52.5%
Medium skill 0.038 233.4% -1.1% -132.3%
High skill 0.015 175.0% 10.3% -85.3%

Source: Own calculation.

lows: Local labor markets essentially differ in their (maximum) firm productivity 𝑝𝑚 ̄ and in the
reservation wages of workers, 𝑏𝑚 + 𝜌𝑚 , which are calibrated to match wages and job-finding
rates. Labor markets with higher job-finding rates (such as high-skill ones) tend to have higher
productivity 𝑝𝑚 ̄ , and this is the reason why firms create more vacancies and hence market
tightness is larger. However, these more productive markets also have higher reservation
wages and the ratio between the two objects, 𝑝𝑚 ̄ /(𝑏𝑚 + 𝜌𝑚 ), is lower in tighter markets. By
optimality condition 3.11, this implies that firms must become more selective as they offer
sufficiently high wages to fill their positions, which ultimately reduces matching efficiency.

Effort plays a rather small quantitative role compared to the other two margins because of the
relatively large estimated value of the effort cost elasticity 𝛾. However, even when we reduce
this parameter substantially to 𝛾 = 2, the contribution of search effort to the variation of
job-finding rates increases to 29 percent, while tightness and selectivity remain the two most
important margins for the variation of job-finding rates across markets.

We further explore to what extent variation across regions or across skill groups is driven by
the different margins. Regarding variation across the 12 regional labor markets, the bottom
three rows in Table 5 report the percentage contributions of the three channels to the variance
of job-finding rates, separate for each of the three skill groups. Evidently, the cross-regional
variance of the job-finding rate for each skill group is smaller than the total variance (first col-
umn of the table). Again, tightness and selectivity account for the lion share in cross-regional
differences in job-finding rates, and they work in opposite directions: regions with tighter
markets have more selective firms. Search effort contributes to matching efficiency mostly
in high-skill labor markets.

Variation across skill groups is reported in Table 6. Medium- and high-skill labor markets have
job-finding rates which are around 123 percent (80 log points) larger than those in low skill
labor markets. Much of this gap is accounted for by differences in labor market tightness,
especially for high-skilled workers (2nd column). But also in high-skill labor markets, firms
are considerably more selective, which reduces matching efficiency as compared to markets
for low-skilled workers (4th column). Search effort accounts for a small but positive difference
in job-finding rates across skill groups.

IAB-Discussion Paper 15|2020 37

Table 6: Average log differences to low-skill labor markets

JFR Tightness Search effort Selectivity

Medium skill 0.76 0.81 0.08 -0.13
High skill 0.85 1.74 0.06 -0.95

Source: Own calculation.

4.4 The Role of Recruiting Intensity for Labor Market Policy

Because recruiting intensity responds to the economic environment, it is important to un-

derstand how the different margins of firms’ hiring policies react to changes in labor mar-
ket policy. It is well known that the German labor market experienced a major transition in
the last two decades during which the harmonized unemployment rate declined from over
eleven percent in 2005 to just over three percent in 2019. There is quite some literature dis-
cussing the role of different economic events and policy reforms for this transition. Partic-
ularly the Hartz labor market reforms, which consist of different policy measures, and their
impact on the decline of unemployment have been analyzed extensively in the academic lit-
erature (see Krause/Uhlig, 2012; Krebs/Scheffel, 2013; Dustmann et al., 2014; Hochmuth et
al., 2019; Carrillo-Tudela/Launov/Robin, 2020: among others).

A major part of these reforms concerns a significant reduction of government transfers to

the unemployed, especially for long-term unemployed workers (Hartz IV). There are different
ways how changes in unemployment income (UI) affect the labor market. Besides potential
implications for the job-separation rate (see Hartung/Jung/Kuhn, 2018), most of the literature
focuses on the role of the UI system on the job-finding rate which operate either via the search
intensity margin of workers or via the job-creation decisions of firms.

Although our model, with exogenous separations and with no search intensity margin on the
side of workers, cannot comprehensively analyze these various channels, it is well-suited to
explore to what extent the different margins of recruiting intensity, in addition to the creation
of jobs, contribute to changes in job-finding rates in response to changes of UI. To this end,
we conduct a simple experiment where we compare the stationary equilibrium of our cali-
brated model with a UI replacement rate of 46 percent (post-Hartz period) to the stationary
equilibrium of our model with a higher pre-Hartz reform replacement rate of 57 percent (cf.
Krebs/Scheffel, 2013). For the latter economy we increase unemployment income levels 𝑏𝑚
in all local labor markets in the same proportion to market-specific wages, leaving all other
parameters unchanged.

Table 7 shows how job-finding rates change between the two scenarios. The first column
shows the log change of the job-finding rate in response to the decline of unemployment

IAB-Discussion Paper 15|2020 38

income from 57 to 46 percent. On average, the job-finding rate increases by 27.4 log points
(32 percent). Across skill groups, the increase is strongest for the low-skilled (43.2 log points,
54 percent) and weakest for the high-skilled (16.1 log points, 17 percent). The larger increases
in job-finding rates in low-skill labor markets is consistent with the findings in Carrillo-Tudela/
Launov/Robin (2020), whose data work implies that in low-skill labor markets the job-finding
rate increased by 30.3 percent, while the job finding rates in medium and high skill markets
increased by 25.1 percent and 9.8 percent, respectively, when comparing the 2000-2005 to
the 2010-2014 period.

Table 7: Impact of a decrease of the replacement rate from 57 to 46 percent

JFR Tightness Search effort Selectivity

Total 0.274 0.211 0.002 0.063
Low skill 0.432 0.290 0.007 0.135
Medium skill 0.229 0.198 0.001 0.031
High skill 0.161 0.146 0.000 0.015

Note: The table shows the changes of the reported variables in log points. The first row is averaged over all local
labor markets, the bottom three rows are averaged over regions, separately for each skill group. Source: Own
calculation.

The remaining columns of the table build again on equation 4.3 which gives an exact decom-
position of the log change of the job-finding rate (in each local market) into the sum of log
changes of four components: market tightness plus three margins of recruiting intensity. The
wage dispersion term 𝑚𝑊 does not contribute to policy changes. While the level of wages
falls on average by 3.1 percent with lower UI, the dispersion across firms within the local la-
bor markets is unchanged.

Table 7 shows that the job-creation margin (tightness) is responsible for about three quarters
of the increase of the job-finding rate (21.1) log points, while the rest is accounted for by the
selectivity margin (6.3 log points). Search effort plays only a negligible role. With lower UI and
firm productivity unchanged, hiring thresholds are lower (see condition 3.11). At the same
time, it becomes more attractive to create jobs and exert higher search effort. This is the
reason why tightness and effort increase, while firms become less selective.

Across skill groups, job creation remains the strongest contributor, but the selectivity margin
is relatively more important for the low skilled where it accounts for about a third of the in-
crease in the job-finding rate and less relevant for the high skilled where it accounts for less
than ten percent of the increase of the job-finding rate. Especially in low-skill labor markets,
firms reduce their hiring standards in response to a decrease of unemployment income which
has a quantitatively significant impact on the job-finding rate.

IAB-Discussion Paper 15|2020 39

5 Conclusions

In this paper we use novel survey and administrative data for Germany and document that
different dimensions of recruiting intensity, namely wage policies, search effort and hiring
standards, vary systematically with an establishment’s hiring rate. This result is robust after
controlling for a wide range of employer and job characteristics. Further, across local labor
markets, defined as the cross-product between three skill groups and 12 geographic regions,
we find that these three recruitment margins contribute significantly to the variation of va-
cancy yields. We propose a directed search model with heterogeneous multi-worker firms in
order to analyze the mechanisms behind these patterns and to evaluate the role of recruit-
ment policies for matching efficiency and for the impact of labor market policy.

In our quantitative analysis, we calibrate the model such that it replicates the main microeco-
nomic relationships that we document in our empirical analysis, in particular about the rel-
ative sensitivities of search effort, wage generosity and hiring standards across hiring estab-
lishment. Then we verify that the model fits several facts about the cross-market variation of
job-finding rates, vacancy yields and aggregate indicators of recruitment policies. A key fea-
ture of our model is that it provides a structural decomposition of the aggregate job-finding
rate in terms of labor market tightness and the three recruitment policies. Most of the varia-
tion of the job-finding rate across local labor markets is driven by market tightness and hiring
standards which turn out to operate in opposite directions: Tighter markets go together with
stricter hiring standards which reduces matching efficiency. This feature occurs both across
the skill and geographic dimensions. Search effort only plays an important quantitative role
for matching efficiency in high-skill labor markets, whereas it does not matter much in lower-
or medium-skill markets.

These features suggest heterogenous effects when considering the impact of labor market
policies on employers’ recruiting intensity and ultimately on the re-employment chances of
the unemployed. To investigate this further we propose a simple exercise that mimics the
drastic change in unemployment benefits as implemented in Germany during the Hartz la-
bor market reforms. We find that the increase of the job-finding rate can be attributed mainly
to two factors: higher vacancy creation and reductions in hiring standards where the latter
response is particularly stark in low-skill labor markets. This result supports the finding of
Carrillo-Tudela/Launov/Robin (2020) who document that the reduction in unemployment af-
ter the Hartz reforms was largely due to workers moving from non-employment into low-skill
part-time jobs which, as part of the reforms, also became much cheaper for employers to
set-up and offer.

IAB-Discussion Paper 15|2020 40

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Appendix

A. Data Appendix

For our analyses we use survey and administrative data of the Institute for Employment Re-
search (IAB). The administrative data are processed and kept by IAB according to German
Social Code III. There are certain legal restrictions due to the protection of data privacy. The
data contain sensitive information and therefore are subject to the confidentiality regulations
of the German Social Code (Book I, Section 35, Paragraph 1).33

A.1 Summary Statistics

Table 8 presents the main characteristics of our sample. In particular, the vast majority of
the establishments in the JVS are small with less than 20 employees and about 50 percent of
them are in the trade and retail sector or provide commercial or social services.34 Establish-
ments are also more likely to report they face workforce or demand restrictions than financial
restrictions.

In terms of the last filled job the majority of establishments require a vocational training,
while long-term experience is also a common job requirement. These vacancies are typically
filled in two months. Table 9 reports variation in average vacancy durations across skill cate-
gories, where low skill represents jobs for workers who have not completed post-school edu-
cation, medium skill represents jobs which require vocational training; and high skill are jobs
that require a university degree. Low-skill vacancies are filled in about a month and a half and
high-skill vacancies in about two-and-a-half months. Table 8 shows that establishments end
up receiving an average of 13 applications for their vacancies, but Table 9 shows there is large
variation across skill categories where low-skill vacancies receive on average 10 applications
and high-skill ones receive on average 20 applications. Employers end up interviewing on
average about only one quarter of these applicants. Once again we observe large variation
across skill categories such that establishments end up interviewing about 40 percent of the
applicants for low-skill vacancies but only 20 percent of applicants for high-skill ones.

33
The data are held by the Institute for Employment Research (IAB), Regensburger Str. 104, 90478 Nurem-
berg, Germany. To access the data for replication purposes, please get in contact with Hermann Gartner (her-
[email protected]).
34
The manufacturing category encompasses (i) Nutrition, textiles, clothing, furniture; (ii) Wood, paper, print-
ing, publishing; (iii) Chemistry, plastics, glass, construction materials; and (iv) Machines, electronics, vehicles
industries. The natural resources category encompasses the (i) Agriculture, forestry, fishing; (ii) Metal, metal
products; and (iii) Energy, mining industries. The other services category encompasses (i) Finance, insurance;
and (ii) Public administration industries.

IAB-Discussion Paper 15|2020 44

Table 8: Sample characteristics (JVS and IEB)

No. Obs Mean Std. Dev. No. Obs Mean Std. Dev.
Establishments (JVS)
Age (years) 68,440 17.366 12.473 Industry distribution 68,681
Size distribution 68,681 Manufacturing 0.083 0.139
< 20 0.698 0.459 Natural Resources 0.060 0.131
20 − 49 0.176 0.381 Construction 0.107 0.309
50 − 199 0.103 0.304 Trade and retail 0.184 0.388
200 − 499 0.016 0.126 Hospitality 0.075 0.264
500+ 0.007 0.084 Commercial services 0.173 0.378
Restrictions 68,681 Transport, communication 0.059 0.235
Demand 0.117 0.322 Other private & public services 0.063 0.244
Financial 0.046 0.209 Social services 0.160 0.367
Workforce 0.169 0.375 Other services 0.158 0.186
Jobs (JVS)
Qualification requirements 57,432 Number of applications 50,356 13.333 19.741
Unskilled 0.168 0.374 Number of suitable applicants 47,773 3.839 4.479
Vocational training/Tech College 0.639 0.480 Number of interviews 22,767 3.517 3.051
Bachelor/Master/PhD 0.194 0.395 Paid higher wage than expected 72,709 0.116 0.321
Experience 59,785 Accepted lower experience 72,709 0.095 0.293
Long-term exp. 0.360 0.480 Accepted lower qualification 72,709 0.079 0.270
Leadership exp. 0.084 0.278 Number of channels 68,945 2.965 1.974
Vacancy duration (days) 49,049 59.503 59.273 Recruitment international 63,005 0.038 0.191
Workers (IEB)
Education 54,519,822 Labor market experience 54,519,822
Unskilled 0.103 0.304 Potential exp. (years) 17.741 10.856
Vocational training/Tech College 0.710 0.454 Establishment tenure (years) 7.424 8.590
Bachelor/Master/PhD 0.187 0.390

Source: Own calculation.

In terms of the usage of recruitment policies, Table 8 shows that about 10 percent of all es-
tablishments in our sample report using wages and/or lowering hiring standards to fill their
jobs with large variation across skill categories, where 20 percent of employers end up offer-
ing a higher wage when filling high-skill jobs but only 7 percent of them when filling low-skill
ones. Although not shown in these tables, we find that about 80 percent of establishments
that report hiring a worker with lower qualifications also report hiring a worker with lower ex-
perience than expected. Among those establishments who report reducing hiring standard
about 20 percent of them also report paying more than expected. Establishments use about
three search channels on average with little variation across skill categories. The more search
channels they use, the more frequently they report to pay more than expected (the fraction
increases monotonically from 9 percent for establishments using only one channel up to 55
percent for those that use 12 channels). A similar relationship holds for reducing hiring stan-
dards (6 percent in establishments using one channel and 36 percent in establishments using
12 channels).

Worker information from the IEB is presented at the bottom of Table 8. It refers to the edu-
cation and experience characteristics of those workers who were employed in JVS establish-
ments during the sample period. Overall, this information suggests that workers employed in
JVS establishments exhibit education and experience characteristics that are similar to those
found in the general labor force.

IAB-Discussion Paper 15|2020 45

Table 9: Sample characteristics by skill group (JVS)

Low skill Medium skill High skill

Mean St. dev. N Mean St. dev. N Mean St. dev. N
Vacancy duration (days) 43.915 54.167 5,874 59.387 59.145 32,986 73.173 60.248 9,127
Number of applicants 9.793 16.278 5,917 12.392 18.506 34,214 19.562 24.663 9,296
Number of suitable applicants 3.459 4.381 5,533 3.628 4.213 32,487 4.856 5.217 8,928
Number of interviews 3.750 3.688 3159 3.330 2.863 15,131 3.849 2.921 4,069
Paid higher wage than expected 0.075 0.263 7,798 0.152 0.359 41,746 0.155 0.362 10,952
Accepted lower experience 0.096 0.294 7,798 0.110 0.313 41,746 0.083 0.276 10,952
Accepted lower qualification 0.089 0.284 7,798 0.098 0.298 41,746 0.048 0.215 10,952
Number of search channels 3.414 2.389 7,534 3.405 2.123 40,321 3.611 2.015 10,709
Recruitment international 0.085 0.279 7,142 0.039 0.195 36,118 0.088 0.283 9,261

Source: Own calculation.

A.2 Composition of Hires

Figure 6 shows to what extent the composition of hires changes when the establishment’s
employment growth rate varies from zero to 30 percent. Fast-growing establishments hire
slightly more unemployed workers and more females. There is no evidence, however, that
these establishments hire more foreign workers, workers above 50 years of age or from long-
term unemployed.

Figure 6: Shares of hires by 30-day establishment growth

(j) Unemployment (k) Long-term unemployment (l) Female

(v) Foreign (w) Under 25 (x) Over 50

Source: Own calculation.

IAB-Discussion Paper 15|2020 46

A.3 Relationship Between Hiring Rates and Recruitment Policies in the JVS

Regression coefficients.

Table 10 presents the regression coefficients of the hiring rate that are behind Figures 2-4.
The first column of each regression reports the hiring rate coefficients without further con-
trols; the second column reports the coefficients also controlling for year dummies, estab-
lishments’ industry, (five) size categories, age, the job’s 1-digit occupation, three levels of
skill requirements, dummies for long-term experience and leadership requirements, and a
dummy for whether this was a newly created job or not. In all cases we use the zero hiring bin
as the baseline category.

Table 10: Recruitment policies and hiring rates - Regression coefficients

Wage concessions IEB - Wage premium Wage generosity Number of channels Geographic Search
Hiring bin (max)
∗∗∗ ∗∗∗
0.015 -0.036 -0.0094 0.0036 -0.003 0.018 0.0026 0.7869 0.0625 -0.0056 -0.0149∗∗∗
0.02 -0.0308∗∗∗ -0.0112 -0.0014 -0.0065 0.037 0.0193 0.7512∗∗∗ 0.0557 -0.0019 -0.0065
0.03 -0.0199∗∗∗ -0.0042 0.0008 -0.0109 0.0523 0.0162 0.6479∗∗∗ 0.1454∗∗∗ 0.005 -0.0007
0.04 -0.0077 0.0091 0.0117 -0.0032 0.0897∗∗∗ 0.0561∗ 0.6078∗∗∗ 0.1574∗∗∗ 0.0035 -0.0042
0.05 -0.0026 0.0095 0.0151 -0.0028 0.1045∗∗∗ 0.0515 0.6348∗∗∗ 0.2096∗∗∗ 0.0108∗∗∗ 0.0032
0.075 0.004 0.0118∗∗∗ 0.0239∗∗ 0.0023 0.135∗∗∗ 0.0682∗∗ 0.5945∗∗∗ 0.281∗∗∗ 0.0157∗∗∗ 0.0088∗∗∗
0.1 0.017∗∗∗ 0.0266∗∗∗ 0.0371∗∗∗ 0.0122 0.1799∗∗∗ 0.1116∗∗∗ 0.5782∗∗∗ 0.2905∗∗∗ 0.017∗∗∗ 0.0095∗∗∗
0.125 0.0275∗∗∗ 0.0291∗∗∗ 0.0366∗∗∗ 0.0133 0.2181∗∗∗ 0.1299∗∗∗ 0.6091∗∗∗ 0.3878∗∗∗ 0.0229∗∗∗ 0.0118∗∗∗
0.15 0.0176∗∗∗ 0.0223∗∗∗ 0.049∗∗∗ 0.0212∗ 0.2122∗∗∗ 0.1258∗∗∗ 0.6725∗∗∗ 0.4256∗∗∗ 0.034∗∗∗ 0.0214∗∗∗
0.175 0.0246∗∗∗ 0.0258∗∗∗ 0.0672∗∗∗ 0.0434∗∗∗ 0.2667∗∗∗ 0.1862∗∗∗ 0.6198∗∗∗ 0.4234∗∗∗ 0.02∗∗∗ 0.007
0.2 0.0282∗∗∗ 0.0302∗∗∗ 0.0615∗∗∗ 0.0378∗∗∗ 0.2964∗∗∗ 0.2241∗∗∗ 0.6595∗∗∗ 0.4332∗∗∗ 0.0372∗∗∗ 0.0182∗∗∗
0.25 0.0436∗∗∗ 0.0425∗∗∗ 0.07∗∗∗ 0.0393∗∗∗ 0.2944∗∗∗ 0.186∗∗∗ 0.5891∗∗∗ 0.4422∗∗∗ 0.046∗∗∗ 0.0309∗∗∗
Controls X X X X X
Constant 0.1108∗∗∗ 0.0442∗∗∗ -0.0995∗∗∗ -0.0557∗∗∗ -0.1578∗∗∗ -0.1237∗∗ 2.5305∗∗∗ 0.9029∗∗∗ 0.0255∗∗∗ 0.0527∗∗∗
𝑅2 0.003 0.0515 0.0097 0.0206 0.0152 0.0471 0.0217 0.1033 0.0054 0.0406
N obs 68,681 59,268 29,637 22,626 25,788 22,626 65,209 57,347 59,365 51,242
Search effort Qualification Mismatch Experience Mismatch IEB - Selectivity Selectivity (JVS+IEB)
Hiring bin (max)
0.015 0.2083∗∗∗ -0.0098 -0.0435∗∗∗ -0.0075 -0.0433∗∗∗ -0.0124 -0.0027 -0.0194 -0.0405 -0.0426
0.02 0.2∗∗∗ -0.0037 -0.0377∗∗∗ -0.0031 -0.0374∗∗∗ -0.0096 -0.0024 -0.0138 -0.0476 -0.0367
0.03 0.1932∗∗∗ 0.0402∗∗∗ -0.0388∗∗∗ -0.0113∗∗ -0.0396∗∗∗ -0.0145∗∗∗ -0.0103 -0.0215∗ -0.0517∗ -0.0345
0.04 0.1781∗∗∗ 0.0364∗∗∗ -0.0265∗∗∗ -0.0013 -0.0224∗∗∗ -0.0004 -0.0209∗∗ -0.0339∗∗∗ -0.0937∗∗∗ -0.0739∗∗
0.05 0.2048∗∗∗ 0.0712∗∗∗ -0.016∗∗∗ 0.0052 -0.0203∗∗∗ -0.0003 -0.0267∗∗∗ -0.0403∗∗∗ -0.114∗∗∗ -0.0872∗∗∗
0.075 0.1972∗∗∗ 0.0947∗∗∗ -0.0133∗∗∗ 0.0015 -0.0073∗∗ 0.0052 -0.0134 -0.0294∗∗∗ -0.1223∗∗∗ -0.0861∗∗∗
0.1 0.1939∗∗∗ 0.0979∗∗∗ -0.0039 0.0098∗∗∗ -0.0083∗ 0.0036 -0.0157 -0.0326∗∗∗ -0.1522∗∗∗ -0.1103∗∗∗
0.125 0.2219∗∗∗ 0.1382∗∗∗ 0.0072 0.0209∗∗∗ 0.0045 0.0151∗∗∗ -0.0187∗ -0.0364∗∗∗ -0.1794∗∗∗ -0.1369∗∗∗
0.15 0.255∗∗∗ 0.1607∗∗∗ 0.0019 0.0135∗∗ -0.0012 0.0085 -0.0191∗ -0.0347∗∗∗ -0.1501∗∗∗ -0.0954∗∗∗
0.175 0.2162∗∗∗ 0.1322∗∗∗ 0.017∗∗∗ 0.0256∗∗∗ 0.0138∗∗ 0.0184∗∗ -0.0105 -0.0327∗∗ -0.1877∗∗∗ -0.1525∗∗∗
0.2 0.2643∗∗∗ 0.1621∗∗∗ 0.0173∗∗ 0.0227∗∗∗ 0.0334∗∗∗ 0.0384∗∗∗ -0.0121 -0.0265∗ -0.1882∗∗∗ -0.1268∗∗∗
0.25 0.27∗∗∗ 0.1931∗∗∗ 0.0248∗∗∗ 0.0256∗∗∗ 0.0246∗∗∗ 0.0266∗∗∗ -0.0094 -0.0335∗∗ -0.221∗∗∗ -0.1578
Controls X X X X X
Constant -0.1796∗∗∗ -0.5947∗∗∗ 0.0854∗∗∗ 0.0773∗∗∗ 0.1010∗∗∗ 0.0888∗∗∗ -0.0449∗∗∗ -0.0009 0.1458∗∗∗ 0.1103∗
𝑅2 0.0182 0.1007 0.0039 0.0199 0.0031 0.0149 0.0003 0.007 0.0056 0.0158
N obs 65,209 57,347 68,681 59,268 68,681 59,268 29,144 22,343 25,446 22,343
Note: ∗ -significant at a 10%, ∗∗ -significant at a 5%, ∗∗∗ -significant at a 1%. Source: Own calculation.

Excluding zero hires and removing the smallest establishments.

Figure 7 and Figure 8 show the relationships between the establishment hiring rate and the
three main recruitment indices 𝑤̂ , 𝑠, 𝑒 as defined in Section 2, where we either exclude all
observations with zero hires or where we remove the smaller establishments with less than
20 workers. The main insights presented in Figures 2-4 remain: Establishments with larger
hiring rates exert more effort, pay more generous wages and reduce their hiring standards.

IAB-Discussion Paper 15|2020 47

Figure 7: Variation of the main recruitment indices (with zero hires observations removed).
(j) Wage generosity (k) Hiring standards (l) Search effort

Source: Own calculation.

Figure 8: Variation of the main recruitment indices (only establishments with 20+ workers).
(j) Wage generosity (k) Hiring standards (l) Search effort

Source: Own calculation.

A.4 Vacancy Yields Across Labor Markets

The results presented in Table 1 show using OLS regressions of vacancy yields across labor
markets that coefficients on wage generosity and search effort are positive while the one on
hiring standards is negative. These relationships are statistically significant for search effort
and higher standards, but not for wage generosity. Table 11 shows that a similar conclusion
arises when controlling for market (i.e. skill×region) fixed effects. Here, however, the rela-
tionship between search effort and vacancy yields across markets is somewhat less strong.
Further, comparing the coefficients of determination across columns, a similar picture arises
as with the OLS regressions, where all three measures improve the fit of the fixed effects
regression in a similar magnitude as labor market tightness which on its own generates an
𝑅2 = 0.056.

IAB-Discussion Paper 15|2020 48

Table 11: Vacancy yields across labor markets
Fixed effects
𝜃 - Market tightness -1.637∗∗∗ -1.427∗∗∗ -1.406∗∗∗ -1.411∗∗∗ -1.435∗∗∗ -1.396∗∗∗
(0.335) (0.338) (0.326) (0.337) (0.339) (0.329)
Search Effort 0.550∗∗∗ 0.406
(0.246) (0.249)
Hiring Standards -1.237∗∗∗ -1.140∗∗∗
(0.376) (0.329)
Wage Generosity 0.388 0.165
(0.250) (0.254)
Constant 2.238∗∗∗ 2.754∗∗∗ 2.737∗∗∗ 2.767∗∗∗ 2.710∗∗∗ 2.734∗∗∗
𝑅2 0.056 0.113 0.136 0.134 0.132 0.151
Year dum. N Y Y Y Y Y
N obs 288 288 288 288 288 288
∗∗∗
𝑝 < 0.001; ∗∗ 𝑝 < 0.05; ∗ 𝑝 < 0.10. Standard errors in parenthesis.

Source: Own calculation.

B. Closed-Form Model Solutions

For the parameterization used in Section 4, there are closed-form expressions for the firms’
policy variables:

𝑥𝑝̃ = (𝑏 + 𝜌)𝑝−1 ,
𝜇𝑚0 (𝑏 + 𝜌)1−𝛼 𝑥𝛼
0𝑝
𝛼 1/(1−𝜇)
𝜆𝑝 = [ ] ,
(𝑟 + 𝑠 + 𝛿)𝜌(𝛼 − 1)
𝜌(1 − 𝜇) 1/(𝛾−1) 1/(𝛾−1)
𝑒𝑝 = [ ] ⋅ 𝜆𝑝 ,
𝑐𝑒 𝛾𝜇
𝑐 (𝛾 − 1) 1/(Φ−1) 𝛾/(Φ−1)
𝑉𝑝 = [ 𝑒 ] ⋅ 𝑒𝑝 .
𝑐𝑉 Φ

We can further obtain closed-form expressions for a number of cross-sectional statistics where
we make use of the following result.

Lemma: Let 𝑋𝑝 = 𝐴𝑝𝛽 , for some parameters 𝐴, 𝛽, and let 𝑝 be distributed with cdf Π(𝑝) =
(𝑝/𝑝)̄𝜂 . Then the mean and the variance of 𝑋𝑝 are

𝐴𝜂 𝛽 𝛽2
𝔼(𝑋𝑝 ) = 𝑝̄ , var(𝑋𝑝 ) = 𝔼(𝑋𝑝 )2 .
𝛽+𝜂 (2𝛽 + 𝜂)𝜂

Using this lemma and the above expressions, we obtain cross-sectional statistics for the means
of vacancies 𝑉𝑝 , hires 𝐻𝑝 = 𝑚(𝜆𝑝 )(1 − 𝐺(𝑥𝑝̃ ))𝑒𝑝 𝑉𝑝 and vacancy yields 𝐻𝑝 /𝑉𝑝 (all within a

IAB-Discussion Paper 15|2020 49

given local labor market):
1 𝛾 𝛾
𝑐𝑒 (𝛾 − 1) Φ−1 𝜌(1 − 𝜇) (Φ−1)(𝛾−1) 𝑚 𝜇(𝑏 + 𝜌)1−𝛼 𝑥𝛼 (Φ−1)(𝛾−1)(1−𝜇)
𝔼(𝑉𝑝 ) =( ) ⋅( ) ⋅( 0 0
) ⋅
𝑐𝑉 Φ 𝜇𝑐𝑒 𝛾 𝜌(𝑟 + 𝑠 + 𝛿)(𝛼 − 1)
𝜂 𝛼𝛾

𝛼𝛾 ⋅ 𝑝̄ (Φ−1)(𝛾−1)(1−𝜇) ,
𝜂 + (Φ−1)(𝛾−1)(1−𝜇)
1 Φ+𝛾−1 𝛾Φ
𝑥0 𝛼 𝑐 (𝛾 − 1) Φ−1 𝜌(1 − 𝜇) (Φ−1)(𝛾−1) 𝑚 𝜇(𝑏 + 𝜌)1−𝛼 𝑥0𝛼 (Φ−1)(𝛾−1)(1−𝜇) −1
𝔼(𝐻𝑝 ) =𝑚0 ( ) ⋅( 𝑒 ) ⋅( ) ⋅( 0 ) ⋅
𝑏+𝜌 𝑐𝑉 Φ 𝜇𝑐𝑒 𝛾 𝜌(𝑟 + 𝑠 + 𝛿)(𝛼 − 1)
𝜂 𝛼𝛾Φ

𝛼𝛾Φ ⋅ 𝑝̄ (Φ−1)(𝛾−1)(1−𝜇) ,
𝜂+ (Φ−1)(𝛾−1)(1−𝜇)
1 1−𝜇+𝜇𝛾
𝑥0 𝛼 𝜌(1 − 𝜇) 𝛾−1 𝑚 𝜇(𝑏 + 𝜌)1−𝛼 𝑥𝛼 (𝛾−1)(1−𝜇) 𝜂 𝛼𝛾
𝔼(𝐻𝑝 /𝑉𝑝 ) =𝑚0 ( ) ⋅( ) ⋅( 0 0
) ⋅ 𝛼𝛾 ⋅ 𝑝̄ (𝛾−1)(1−𝜇) .
𝑏+𝜌 𝜇𝑐𝑒 𝛾 𝜌(𝑟 + 𝑠 + 𝛿)(𝛼 − 1) 𝜂+ (𝛾−1)(1−𝜇)

Integrating over 𝑉𝑝 𝑒𝑝 𝜆𝑝 for all firms, we further obtain an expression for aggregate unem-
ployment
1 Φ+𝛾−1 𝛾Φ
𝑐𝑒 (𝛾 − 1) Φ−1 𝜌(1 − 𝜇) (Φ−1)(𝛾−1) 𝑚 𝜇(𝑏 + 𝜌)1−𝛼 𝑥𝛼 (Φ−1)(𝛾−1)(1−𝜇)
𝑈 =( ) ⋅( ) ⋅( 0 0
) ⋅
𝑐𝑉 Φ 𝜇𝑐𝑒 𝛾 𝜌(𝑟 + 𝑠 + 𝛿)(𝛼 − 1)

𝜂 𝛼𝛾Φ

𝛼𝛾Φ ⋅ 𝑝̄ (Φ−1)(𝛾−1)(1−𝜇) .
𝜂+ (Φ−1)(𝛾−1)(1−𝜇)

The above expressions make clear that parameters 𝑐𝑒 , 𝑚0 , 𝑥0 and 𝑝̄ affect the means of these
variables in the same way, so that they cannot be separately identified from aggregate statis-
tics. Indeed, all four expressions above depend on these parameters through the term
𝛾
1−𝜇
𝑐𝑒−1 (𝑚0 𝑥𝛼 𝛼
0 𝑝̄ ) .

Hence, parameters 𝑐𝑒 , 𝑚0 , 𝑥0 and 𝑝̄ influence the vacancy yield, aggregate vacancies, aggre-
gate unemployment and aggregate hires with the same log-linear proportions, so that only
one of these parameters can be identified from the above data targets. To obtain intuition
for this result, a lower value of 𝑥0 (less productive workers on the job) requires a higher pro-
ductivity of firms 𝑝̄ to generate the same number of hires, unemployment, vacancy yield etc.
A lower matching efficiency 𝑚0 requires a higher value of (𝑥0 𝑝)̄𝛼 to compensate for a lower
meeting rate with a higher selection probability so as to end up with the same number of
hires, unemployment, vacancy yield, etc. The reason why 𝑐𝑒 cannot be separately identified
is that a higher value of 𝑐𝑒 reduces recruitment effort 𝑒, and thus hires, unemployment etc. in
the same proportion as a decrease of either 𝑚0 or (𝑥0 𝑝)̄𝛼 would do.

Because employment in projects of productivity 𝑝 is 𝐻𝑝 /(𝑠 + 𝛿), aggregate employment is

simply 𝔼(𝐻𝑝 )/(𝑠+𝛿). The job-finding rate is given by aggregate hires per unemployed worker
which simplifies to
𝔼(𝐻𝑝 ) 𝜌(𝑟 + 𝑠 + 𝛿)(𝛼 − 1)
= .
𝑈 𝜇(𝑏 + 𝜌)
Regarding wages, the model neither pins down wage-tenure profiles nor the variation of wages
across workers within the same firm. Assuming that individual wages are constant over time,

IAB-Discussion Paper 15|2020 50

they need to satisfy (see 3.7 and 3.13)

𝑚(𝜆𝑝 )
𝜌(𝑟 + 𝑠 + 𝛿) = ∫ 𝑤(𝑥) − 𝑏 − 𝜌 𝑑𝐺(𝑥) = 𝑚′ (𝜆𝑝 ) ∫ 𝑝𝑥 − 𝑏 − 𝜌 𝑑𝐺(𝑥) .
𝜆𝑝 𝑥̃𝑝 𝑥̃𝑝

One wage schedule which is compatible with this condition and which also satisfies the lim-
ited commitment constraint that neither the firm nor the worker would dissolve the contract
ex-post is
𝑤𝑝 (𝑥) = (1 − 𝜇)(𝑏 + 𝜌) + 𝜇𝑝𝑥 ,

where 𝜇 is the constant matching function elasticity.35 Because expected match-specific pro-
ductivity is 𝔼(𝑥|𝑝) = 𝛼𝑥𝑝̃ /(𝛼 − 1), the mean wage in projects with productivity 𝑝 is

𝛼+𝜇−1
𝔼(𝑤|𝑝) = (𝑏 + 𝜌) .
𝛼−1
Output per worker (productivity) in such a project is
𝛼
𝔼(𝑝𝑥|𝑝) = (𝑏 + 𝜌) .
𝛼−1
Because more productive projects employ less productive workers, average productivity and
wages in all projects (and all firms) are identical.

35
If the firm would provide perfect insurance to its applicants against realization of 𝑥, it would offer the same
wage to all workers which is then 𝑤(𝑥) = 𝑤 = (𝑏 + 𝜌)(𝛼 + 𝜇 − 1)/(𝛼 − 1). Alternatively, the log-linear
schedule 𝑤(𝑥) = 𝑝𝑥(𝛼 + 𝜇 − 1)/𝛼 also satisfies the above condition. Both alternatives either violate limited-
commitment constraints on either the worker (who prefers to quit when 𝑤 < 𝑏 + 𝜌) or the firm (which prefers
to layoff the worker ex-post if 𝑤 > 𝑝𝑥).

IAB-Discussion Paper 15|2020 51

Imprint
IAB-Discussion Paper 15|2020

Publication Date
25 May 2020

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Institute for Employment Research
of the Federal Employment Agency
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Germany

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Hermann Gartner
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